Needing a second opinion on my $51k tax obligation

Los Angeles County, California
Tax, SDIRAs & Cost Segregation
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Needing a second opinion on my $51k tax obligation

Rob PattisonPro Member
Specialist · Hermosa Beach, CA · Member since 2016 · 94 posts · 55 votes

I bought a house in Costa Rica, using partially money from my 401k through a covid distribution, which meant I escaped the 10% penalty but still am liable for income tax.

I'm 59, and took out approximately $200k.  This house is on the beach and will serve as a retirement home as well as an airbnb rental.

Per my CPA's advice, I was able to deduct all my travel to Costa Rica, and hotels, since this house is within a corporation and I intend mostly at this point in my life to rent via airbnb the house, staying there for about 1 week every 90 days to work, do additional rehab/improvements and catch waves with my surfboard.

My CPA initially calculated a tax obligation of $51k, which I thought was too high.  His explanation was that he "was not equipped" to take all my deductions that year, and instead amortized them over many years.

The next day I sent him an email offering to pay more for his time to sharpen his pencil.   He then came up with an obligation of $24k, much better, but still not where I think it should be..........more like under $10k.

Does anyone have a referral to an professional CPA who deals with Real Estate and is aggressive in coming up with the lowest, legal tax obligation for their clients?    I live in the south bay area of Los Angeles, near the ocean.

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
4y
Quote from @Zachary Hawkins:

@Rob Pattison I hired 2 CPAs this year and will go with the better of the two. Maybe you try a couple. Worst case you are out a $600 tax write off, but at least you know. Better odds than blackjack...


If you hired $600 CPAs, you were not choosing from the top shelf  ;)

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    4y

    Did he advise you to get the corporation or your attorney did? you might not be able to take the losses even if harnessed with a corp. 

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  • Brian Garlington
    Realtor · Oakland, CA and a Real Estate Investor with Multi-Family Units and a Self Storage Facility · Member since 2016 · 2k+ posts · 2k+ votes
    4y
    Quote from @Rob Pattison:

    I bought a house in Costa Rica, using partially money from my 401k through a covid distribution, which meant I escaped the 10% penalty but still am liable for income tax.

    I'm 59, and took out approximately $200k.  This house is on the beach and will serve as a retirement home as well as an airbnb rental.

    Per my CPA's advice, I was able to deduct all my travel to Costa Rica, and hotels, since this house is within a corporation and I intend mostly at this point in my life to rent via airbnb the house, staying there for about 1 week every 90 days to work, do additional rehab/improvements and catch waves with my surfboard.

    My CPA initially calculated a tax obligation of $51k, which I thought was too high.  His explanation was that he "was not equipped" to take all my deductions that year, and instead amortized them over many years.

    The next day I sent him an email offering to pay more for his time to sharpen his pencil.   He then came up with an obligation of $24k, much better, but still not where I think it should be..........more like under $10k.

    Does anyone have a referral to an professional CPA who deals with Real Estate and is aggressive in coming up with the lowest, legal tax obligation for their clients?    I live in the south bay area of Los Angeles, near the ocean.


    0Reply
  • Brian Garlington
    Realtor · Oakland, CA and a Real Estate Investor with Multi-Family Units and a Self Storage Facility · Member since 2016 · 2k+ posts · 2k+ votes
    4y

    This is where you don't go with "your CPA".........you hire a tax advisor/CPA that specializes in this sort of thing. I learned the hard way a long time ago that business is business and not to always go with the "family friend"....or the "colleague" you've known for a long time so that is who I will give the business to.

    That mistake cost me a lot of money. Hopefully you can salvage this my man. Fingers crossed.

    By the way...were you 59 or were you 59 1/2 when you took the money out? Apparently tat can make at least a little bit of a difference. Yes that is a serious question.

    0Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    4y

    @Rob Pattison

    If you do not have the confidence in his calculation, you should not sign the return. File an extension and find a good REI-focused accountant in May to review your situation. None of us can take new projects a few days before the deadline. By "us" I refer to the 20+ real estate specialists accountants contributing to this forum.

    To avoid/minimize late penalties and interest, make a payment of what you expect to owe with your extension. I'd go conservative and pay what your CPA calculated, not what you hope you owe.

    1Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    4y

    Everyone’s situation is different. But tacking $200k on to your existing income in California and only owing $10k seems really extreme. I woulda guessed the California portion woulda been almost double that. If you earned zero other income and took this withdrawal and wrote off $100k in expenses you’d probably owe more than $10k right?

    As others have mentioned. I’m not excited that he changed his number from $51k to $24k  at least one of those numbers was really really wrong  I don’t think I could stay with a cpa willing to change their numbers that much because I said they were wrong. 

    GL. 

    0Reply
  • Zachary Hawkins
    Member since 2019 · 9 posts · 5 votes
    4y

    @Rob Pattison I hired 2 CPAs this year and will go with the better of the two. Maybe you try a couple. Worst case you are out a $600 tax write off, but at least you know. Better odds than blackjack...

    0Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    4y
    Quote from @Zachary Hawkins:

    @Rob Pattison I hired 2 CPAs this year and will go with the better of the two. Maybe you try a couple. Worst case you are out a $600 tax write off, but at least you know. Better odds than blackjack...


    If you hired $600 CPAs, you were not choosing from the top shelf  ;)

    3Reply
  • Don Gouge
    Specialist · Johnson City, TN · Member since 2021 · 139 posts · 146 votes
    4y

    Study the IRS codes yourself. You are the one that would go to prison, not your CPA. Seriously,  taxes are a massive part of any deal. I honestly dont see how people can spend so much time, money and effort on investing and then just turn their taxes over to someone else when the taxes are often a third of your deal! 

    0Reply
  • Matthew Irish-JonesBusiness Member
    Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
    4y

    @Rob Pattison I have never in my life heard of a CPA finding a lower tax amount because you offered to pay them more.

    This sounds like an unethical CPA to start with. Not sure what changed and what they are trying to force depreciate but, there are obviously IRS guidelines on how this should be done. These are usually pretty black and white and paying a CPA more does not and should not lead to a lower tax burden.

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  • Rob PattisonPro Member
    OP
    Specialist · Hermosa Beach, CA · Member since 2016 · 94 posts · 55 votes
    4y

    Good Afternoon everyone, thank you for all your advice.

    I am 59, not 59 and 1/2 and so not eligible for additional leeway the older age would offer.

    I like the advice to seek a CPA specializing more in real estate investments.   What my ears picked up on when I met with my CPA to go over his work was when he said he "was not equipped" to take all those deductions over 1 year.  

    Don, I'm not sure investing the time to become an expert in the IRS codes is a good investment of my time anymore than me pouring over a medical journal before a medical procedure would be a good exercise of my time as I don't think I can learn in 1 or 2 weeks what those professionals took years to master.     

    If there is a quick, time-efficient way to read the relevant IRS rule, I'm open to listening to advice.

    2Reply
  • Eddie L.
    NY · Member since 2021 · 143 posts · 45 votes
    4y

    What are all the facts here? You can give ballpark numbers. If this is for the 2021 tax year, definitely should be conservative and pay more than less. Also file an extension for more time to file your return. 
    https://www.irs.gov/forms-pubs...

    https://www.irs.gov/payments

    0Reply
  • Bruce D. Kowal
    Metro NY + New Bedford · Member since 2022 · 294 posts · 216 votes
    4y
    Quote from @Rob Pattison:

    I bought a house in Costa Rica, using partially money from my 401k through a covid distribution, which meant I escaped the 10% penalty but still am liable for income tax.

    I'm 59, and took out approximately $200k.  This house is on the beach and will serve as a retirement home as well as an airbnb rental.

    Per my CPA's advice, I was able to deduct all my travel to Costa Rica, and hotels, since this house is within a corporation and I intend mostly at this point in my life to rent via airbnb the house, staying there for about 1 week every 90 days to work, do additional rehab/improvements and catch waves with my surfboard.

    My CPA initially calculated a tax obligation of $51k, which I thought was too high.  His explanation was that he "was not equipped" to take all my deductions that year, and instead amortized them over many years.

    The next day I sent him an email offering to pay more for his time to sharpen his pencil.   He then came up with an obligation of $24k, much better, but still not where I think it should be..........more like under $10k.

    Does anyone have a referral to an professional CPA who deals with Real Estate and is aggressive in coming up with the lowest, legal tax obligation for their clients?    I live in the south bay area of Los Angeles, near the ocean.

    Why on Earth did you form a corporation, and put title to the house in the corporation?
    0Reply
  • Rob PattisonPro Member
    OP
    Specialist · Hermosa Beach, CA · Member since 2016 · 94 posts · 55 votes
    4y

    In order to buy a house in Costa Rica in the concession zone (beach-adjacent property within 200 yards of the beach), you need to buy within a corporation.   My purchase price included the seller's corporation.

    I don't believe the entity status in Costa Rica of my property affects my US taxes.   The corporation is a Costa Rican entity.

    I will be filing in extension on my taxes in order to do more research and seek alternate tax advice.

    0Reply
  • Greg O'BrienBusiness Member
    Accountant · Boston, MA · Member since 2019 · 386 posts · 336 votes
    4y

    @Rob Pattison you also have strict foreign corp US reporting requirements. I would file an EXT as others have mentioned. The sharpen pencil comment is a red flag

    0Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    4y

    A US person(Citizen or resident) owning a foreign corporation adds significant complications to your return.
    Furthermore, owning a corporation(whether a US or a foreign) definitely does matter.

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  • Rob PattisonPro Member
    OP
    Specialist · Hermosa Beach, CA · Member since 2016 · 94 posts · 55 votes
    4y

    Thank you for your advice Basit and Greg.   My CPA filed for an extension and I've paid my estimated tax.   

    The government taxes our time as well as our money figuring this stuff out.

    0Reply
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