Has anyone here used 1031 exchanges for inherited property? I know OP mentioned using funds for personal residence and debt, but just wondering if that's an option for deferring gains if they wanted to remain in real estate investing?

One important consideration that hasn't been mentioned yet - since you've held this inherited property for 8 years, make sure to check if you've been claiming depreciation on it as a rental property on your tax returns. If so, you'll owe depreciation recapture tax on that amount (taxed at 25%) in addition to the capital gains tax on the appreciation. Also, regarding your debt payoff strategy - while paying off $85K in debt is generally smart, consider the interest rates. If your debt is low-interest (like a mortgage under 4%), you might be better off investing some of those proceeds rather than paying it all off, especially since you'll be taking a tax hit on the sale anyway. For the new home purchase, financing vs. paying cash won't affect your capital gains tax liability from the inherited property sale - that tax is based solely on the sale transaction itself. Choose your financing based on current interest rates, your cash flow needs, and other investment opportunities.

Just to add another wrinkle to this discussion - don't forget about the Section 1256 election under 1256(d) that lets traders avoid the 60/40 split and mark-to-market rules for certain hedging transactions. If your client was using these contracts as hedges for their business rather than for speculation, they might qualify for this election, which would change how the losses are treated.

This is a great discussion about Section 1256 contract losses! I wanted to add one more consideration that hasn't been mentioned yet - the timing of when you file the amended return for the carryback. You have up to 3 years from the due date of the original return (or the date it was filed, if later) to file the amended return claiming the carryback. However, if you're also dealing with NOL carrybacks or other loss carrybacks, the interaction between different types of losses can get complex. Also, keep in mind that carrying back the Section 1256 losses might affect other items on the prior year return, like the 3.8% net investment income tax if your client's AGI was high enough. Sometimes the additional tax savings from avoiding NIIT can make the carryback even more valuable than just the regular income tax savings. One last tip - if you do decide to proceed with the carryback, make sure to include a detailed statement with the amended return explaining the calculation and referencing the Section 1256 contracts that generated the loss. This helps prevent any confusion during IRS processing.

Has anyone dealt with the "reasonable compensation" issue with an S-Corp? I'm getting conflicting advice from different accountants about how much I need to pay myself vs take as distributions.

For graphic design specifically, I'd recommend checking the Bureau of Labor Statistics Occupational Employment and Wages data for "Graphic Designers" in your geographic area. The IRS often references BLS data during audits as it's considered authoritative government data. I also used Glassdoor and PayScale to document salary ranges, but made sure to filter by experience level and location. The key is showing you did your homework - I created a simple spreadsheet with 5-10 comparable positions and their salary ranges, then documented why I chose a specific amount within that range based on my experience and responsibilities. One thing that helped during my audit was showing that my total compensation (salary + distributions) wasn't unreasonably low compared to what an independent contractor in my field would charge for the same work. The IRS wants to see that you're not just minimizing salary to avoid employment taxes, but that there's genuine business reasoning behind your compensation structure.

To answer your second question about why we pay taxes on gross vs net - it's because the tax system is designed so that deductions are controlled by tax policy. If we taxed true "net" (after all your expenses), people would claim all sorts of personal expenses as deductions. Instead, the system defines specific deductions that are allowed (mortgage interest, certain business expenses, etc.) and everything else is considered part of your taxable income. It's not perfect, but it creates a more standardized system.

Box 1 on W-2 isn't actually gross or net - it's somewhere in between. It's your earnings minus pre-tax deductions like 401k, health insurance, HSA, etc. But it's not your take-home pay either because it's before federal/state/local taxes are withheld. The true gross income (what you earned before ANYTHING was taken out) isn't directly shown on a W-2. Box 3 and 5 are closest but even those might have some deductions taken out.

I think there's another major issue with your strategy that no one's mentioned yet. It assumes you can accurately predict which stocks will rise and which will fall. Even professional fund managers struggle with this consistently. What happens if 70% of your picks fall and only 30% rise? Or if they all rise but in different proportions than expected? Your whole strategy depends on having enough losses to harvest when needed, but the market doesn't conveniently provide those when tax time comes around. I've had years where almost everything in my portfolio went up (great for returns, terrible for tax harvesting) and other years where I had plenty of losses but not enough gains to offset!

Great discussion everyone! As someone who's been implementing tax-loss harvesting for a few years, I wanted to add a practical perspective on timing and execution. One thing that's helped me is thinking about this strategy in quarters rather than just at year-end. I review my positions every 3 months to identify harvesting opportunities throughout the year. This helps avoid the December rush when everyone is doing the same thing (which can actually move prices unfavorably). Also, consider using broad market ETFs for your diversified positions instead of individual stocks. Something like VTI or ITOT for your "winner" bucket gives you instant diversification without the stock-picking risk that Romeo mentioned. Then you can use sector ETFs or individual stocks for more targeted loss harvesting when opportunities arise. The key insight I've learned is to make investment decisions first, tax decisions second. Don't let the tail wag the dog - if you have a great long-term position that happens to be down, don't sell it just for tax harvesting if you believe in the underlying investment thesis. One last tip: keep a spreadsheet tracking your wash sale windows. Nothing worse than accidentally triggering the wash sale rule and losing your tax benefit!