Podcast Episode 689: Tax Loopholes- Let's Discuss
Alicia MarksPro Member
Fort Worth, TX · Member since 2020 · 1k+ posts · 2k+ votesPodcast Episode 689: Tax Loopholes- Let's Discuss
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
3yIf I'm understanding you set up a C corp property management business, but it only "manages' your rental?
Your property is long term rental- so passive by nature. So you want REP status to use losses.
Your time spent managing that rental is likely no where near enough for REP status- on a single property....not likely. Recently in speaking with an expert who was the IRS consulting expert on passive loss issues for 20+ years he said that his stance would even be that renovation time/hours didn't qualify at all because they're not "business operating" qualifying hours- the business isn't open yet if the renovations are happening before the rental is in service.
Is it charging your management company fair market for services? Is the property managemetn company reporting taxable income on that amount?
@Michael plak mentioned some issues regarding the C corp issue as a whole
But your CPA's issue may also tie in to your qualifying activity "being a property management business" Not really having a profit motive, meeting the definition of a business per 162. It's only purpose is trying to create a work around to qualify for REPS.
@Michael Plaksundefined
10 Replies
- 3yYonah WeissPro MemberCost Segregation Expert and Investor · Lakewood, NJ · Member since 2017 · 1k+ posts · 1k+ votes
It was a great episode, and you've got some great questions here @Alicia Marks!
I am really excited about the STR 'loophole', what I've found is that many tax professionals are not aware of this.
- Fort Worth, TX · Member since 2020 · 1k+ posts · 2k+ votes3y
Quote from @Yonah Weiss:
It was a great episode, and you've got some great questions here @Alicia Marks!
I am really excited about the STR 'loophole', what I've found is that many tax professionals are not aware of this.
That was definitely a game changer for me. I have stayed out of the STR space so far, but I'm hoping it can remain on the books going forward. It's very helpful for those that may have a higher income producing spouse that rarely has income offset.
- Member since 2021 · 65 posts · 35 votes3y
My strategies for lowering my 2022 tax bill started in 2021 when I heard the REPS episodes on how to offset the taxes I pay on alimony and gig work. I became obsessed and listened to multiple ones repeatedly. I purchased a hoarder house/fixer upper in Nov 2021 with the absolute intent of logging my hours of self renovation and self management after renovating my other rental myself during COVID. I downloaded the REPS tracker and realized that even though my hours will add up to considerably more than 750 or more and 51% of my time, those hours WITHOUT renovations would be hard to come by! I perform most maintenance too. I like most people probably overestimated my time spent "managing" rentals.
I'm now in the long term, furnished rental market. So I formed a Property Management Company in January 2022 that creates Long Term Rentals for Group Home Living spaces and manages them (my "Real Estate Trade or Business"). The PMC purchases furniture and furnishings, sheets, kitchen utensils, etc, collects the rent from the residents, then the company pays me, the Landlord, a set Rent amount regardless of occupancy. I intend to scale and the company allows me to reuse/redistribute furnishings.
I performed a CostSeg Analysis, but was later told by my CPA that I can't use it because my Property Management company that manages my residence I did the Cost Seg on is SEPARATE from my Real Estate Holdings and won't yield a direct tax benefit, even though the house the Company manages is run on my Sched E. I think he's incorrect. The Company was formed as a C-Corp, which was an error on my part so I'm switching to LLC. The House is in a separate LLC.
Strategies for 2023, buy another fixer upper, repeat, while self managing and build a name for my Company locally as the "go-to" place for Group Home Living.
- Fort Worth, TX · Member since 2020 · 1k+ posts · 2k+ votes3y
Quote from @Amy Konopka:
My strategies for lowering my 2022 tax bill started in 2021 when I heard the REPS episodes on how to offset the taxes I pay on alimony and gig work. I became obsessed and listened to multiple ones repeatedly. I purchased a hoarder house/fixer upper in Nov 2021 with the absolute intent of logging my hours of self renovation and self management after renovating my other rental myself during COVID. I downloaded the REPS tracker and realized that even though my hours will add up to considerably more than 750 or more and 51% of my time, those hours WITHOUT renovations would be hard to come by! I perform most maintenance too. I like most people probably overestimated my time spent "managing" rentals.
I'm now in the long term, furnished rental market. So I formed a Property Management Company in January 2022 that creates Long Term Rentals for Group Home Living spaces and manages them (my "Real Estate Trade or Business"). The PMC purchases furniture and furnishings, sheets, kitchen utensils, etc, collects the rent from the residents, then the company pays me, the Landlord, a set Rent amount regardless of occupancy. I intend to scale and the company allows me to reuse/redistribute furnishings.
I performed a CostSeg Analysis, but was later told by my CPA that I can't use it because my Property Management company that manages my residence I did the Cost Seg on is SEPARATE from my Real Estate Holdings and won't yield a direct tax benefit, even though the house the Company manages is run on my Sched E. I think he's incorrect. The Company was formed as a C-Corp, which was an error on my part so I'm switching to LLC. The House is in a separate LLC.
Strategies for 2023, buy another fixer upper, repeat, while self managing and build a name for my Company locally as the "go-to" place for Group Home Living.
@Natalie Kolodij could you shed some light on this Cost Seg question?
- 3yYonah WeissPro MemberCost Segregation Expert and Investor · Lakewood, NJ · Member since 2017 · 1k+ posts · 1k+ votes
@Amy Konopka Good you came to BP for a second opinion, and I'd love to hear what @Natalie Kolodij has to say, but I'm not sure we have enough information to determine if your CPA is incorrect or not. This is why, if you're looking to have a cost seg done, you should first have a conversation with your CPA, to see if you will be able to benefit from it, or to see if you need to find another CPA 😊
The fact that your PMC is held in a C-corp should not have bearing on whether or not you can benefit from the depreciation. You have REPS, so the depreciation should be able to offset not only your schedule E income, but also your income paid to you from the PMC.
- 3yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Quote from @Amy Konopka:
I'm now in the long term, furnished rental market. So I formed a Property Management Company in January 2022 that creates Long Term Rentals for Group Home Living spaces and manages them (my "Real Estate Trade or Business"). The PMC purchases furniture and furnishings, sheets, kitchen utensils, etc, collects the rent from the residents, then the company pays me, the Landlord, a set Rent amount regardless of occupancy. I intend to scale and the company allows me to reuse/redistribute furnishings.
I performed a CostSeg Analysis, but was later told by my CPA that I can't use it because my Property Management company that manages my residence I did the Cost Seg on is SEPARATE from my Real Estate Holdings and won't yield a direct tax benefit, even though the house the Company manages is run on my Sched E. I think he's incorrect. The Company was formed as a C-Corp, which was an error on my part so I'm switching to LLC. The House is in a separate LLC.
Cost segregation applies to the owner of the property, which is a disregarded LLC, which is the same as you personally - assuming your description is accurate. It does not matter what company manages the property.
Possibly your CPA was concerned that you cannot qualify as a Real Estate Professionals when you draw a W2 salary from your C-corp. Again, the fact that it is a C-corp does not matter for this purpose.
Possibly your CPA said something entirely different and you misunderstood. Tax law is confusing. I would start by asking your CPA to clarify, ideally in writing. Then get a second opinion.
My concern is your intention to "switch to an LLC." It is not a simple task, especially if it really is a C-corp. Discuss with your CPA and possibly get a second opinion on this plan, too. Maybe a C-corp is not such a bad idea in your case, and maybe your best approach is switching to something else, for example an S-corp. Pressing buttons without understanding of what they actually do can be dangerous.
- Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes3y
If I'm understanding you set up a C corp property management business, but it only "manages' your rental?
Your property is long term rental- so passive by nature. So you want REP status to use losses.
Your time spent managing that rental is likely no where near enough for REP status- on a single property....not likely. Recently in speaking with an expert who was the IRS consulting expert on passive loss issues for 20+ years he said that his stance would even be that renovation time/hours didn't qualify at all because they're not "business operating" qualifying hours- the business isn't open yet if the renovations are happening before the rental is in service.
Is it charging your management company fair market for services? Is the property managemetn company reporting taxable income on that amount?
@Michael plak mentioned some issues regarding the C corp issue as a whole
But your CPA's issue may also tie in to your qualifying activity "being a property management business" Not really having a profit motive, meeting the definition of a business per 162. It's only purpose is trying to create a work around to qualify for REPS.
@Michael Plaksundefined
- 3yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
@Alicia Marks
I use turbo tax and self manage 17 rentals. I use cost segregation and carry those losses forward each year. When I get an expense, I write it down for that property and jam a receipt in the folder. At the end of the year, it takes me about 2 or 3 minutes per property to calculate my expenses and total rent for the year, and plug the numbers into turbo tax.
- Member since 2021 · 65 posts · 35 votes3y
@Natalie Kolodij I know I completely messed up the structure but I contacted the state and I can easily switch online to an LLC. I haven't filed anything yet since it was just opened 2022. As for REPs that's not the issue. I have photos, receipts and time logs for the renovation—which was done by me (minus plumbing/granite/electrical) That's my job as a REP-I buy one house a year, self renovate because I can. I have no personal expenses and receive alimony, and I'd like REPS to offset the taxes I pay on my alimony and gig work I do (it's not a lot, but it adds up).
I don’t want to sit around and eat bon bons on the couch although it is getting tempting ha ha ha. I gutted the house and I added 270k in equity in 7 months, mainly because I had to space out renovations due to funding. I’m not efficient, nor an expert, but the tax code doesn’t fault me for that.
As for time spent managing the property, I have nine recovering alcoholics and addicts in one home, living together in a Group Family Environment known as a Sober Living Residence. I'm what HUD calls an "owner/operator" so I am also the decorator, landlord, tree trimmer, etc. I am VERY hands on. I don't offer services—I'm not a residential treatment facility or detox. I am not a Sober Living Business as my CPA erroneously called me. While it sounds like a complete $.*#) show that I'm getting myself into, I find it very rewarding. I love these girls. I WANT to be a hands on landlord. They love to see me. Sober living homes have gotten a bad rap, BECAUSE the owners/landlords etc didn't want to be hands on. My "visits" are usually grouped with the business of collecting rent, landscaping, meeting tenants, etc. The interview of a prospective tenant is super labor intensive. Lots of calls, interview paperwork, etc. and many are turned away.
In a nutshell, I (Amy the Landlord) renovated this home and triple net leased it to Amy the Owner of THE LEMONADE house— a Company that provides furnished housing to persons looking to live in Sober Group Home Environment who is willing to submit to House Rules. I don’t provide services, but the tenant WILL provide me drug tests on request, their health history, emergency contacts, agreement to work a program, etc.
And that’s (one of the few) reasons why I think my CPA is incorrect. I can use a cost seg.
- 3yBonnie Griffin KaakePro MemberReal Estate Consultant · Denver, CO · Member since 2021 · 666 posts · 389 votes
@Amy Konopka I must be missing something. I am an expert in cost segregation and the tax and cash-flow benefits available to investors in commercial and residential real estate. As an owner/operator, you should not only be able to take advantage of cost segregation but also as an active investor without REPs status. I am curious, something does not sound right here...maybe I am missing something. Then again, it is not the majority of CPAs/tax professionals that understand the complexities behind cost segregation or other benefits available to investors.
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