Issue with CPA understanding Real Estate Professional

[Julie Washburn]

I am a Real Estate Professional, but I seem to be having trouble with my CPA understanding how to account for this. 2022 was my first year as a Real Estate Professional. My husband has a W-2 job with a large amount of tax withheld. In 2022 we did a cost segregation study to capture a massive amount of depreciation on multiple properties, so there's a lot of bonus depreciation to be taken. Our tax structure has each property in an LLC that is owned by an S Corp, and my husband and myself both own the S Corp. Our CPA is telling us that she did not see any additional ‘basis' or money that you personally invested in the LLC's, so we cannot claim the depreciation from the properties. She is also saying that she set us both at the "no limitation non-passive status" so the Real Estate Professional status is "immaterial".

I would love any help I can get here! I was at the MidTerm Rental Summit this past week and checked in with others, confirming that she doesn't seem to know how to do this. But am I missing something here? I've invested a lot into the cost segregation studies, and I really want to figure out how to capitalize on these tax incentives.

[Natalie Kolodij]

1. You should NOT have rentals effectively in an S corp- who advised that setup? 

2. If you don't have enough basis in an entity that disallows deduction of losses, even before you get to apply the test for potentially deducting them if you qualify as RE pro. 

3. She is saying she has you set as re pro in her software, but it sounds like the losses are being disallowed at the entity level. 

You should work proactively with your tax professional becuase a cost segregation did not help your tax situation due to this limit. 

Maybe geta second opinion- but based on facts given your CPA understands everything, they're not clearly explaining it in a way you're fully understanding though.

Here's a graphic - so your loss becomes a business loss becuase it's now non-passive. But that first step...is the basis limitation. So even though it's non-passive ...if there's no basis it won't be a recognized loss.