Sub-To Tax Advice Needed

[Brendan M Hornung]

Hello everyone,

I reside in Southern California and started my investment journey in March of last year by purchasing a sub-to single-family home in AL. I have had it rented out for longer than six months and I am looking to file taxes for the first time with an investment property in my name.

Does anyone have any advice on filing my taxes this year? Since it is a sub-to deal should I use Turbo Tax, a general CPA, or a CPA specialized din sub-to?

The property is in my name, but I will be switching it to an LLC this year.

Any tips and pointers help out! If more information is needed please send me a message on BP.

Thanks,

Brendan H.

[Michael Plaks]

Quote from @Gregory Wilson:

A few things there, Brendan.

First, an LLC with you as a member and your (wife, son, pal, etc.) partner as a 1% member will file a Form 1065 which is about one tenth as likely to be audited by the IRS as a Form 1040 with a Schedule E rental activity (which I presume you will attempt to show is an active business).

Second, you want an LLC because when your local Alabama handyman drives his girlfriend's uninsured truck into a van load of U of A medical school interns on I-22 when he goes to get some shingles for your roof, on your business, you don't lose everything you have or ever will have to an uninsured claim. Of course you could roll the dice and try to show that he is an "independent contractor" and respondeat superior does not apply. But, as Cousin Vinny reminds us, "we're in f******* Alabama."

Too bad that BiggerPockets does not offer an LOL reaction. You deserved two of them for your AL stand-up routine. Well done.

My 1st comment is outside of my area of expertise. In other words, it is to be ignored. I don't think that simply having an LLC would protect you from that Bubba the roofer. But I'm not an attorney, so maybe I'm totally wrong on this hunch.

My 2nd comment is directly within my practice area though. True, converting a personal Schedule E to a partnership will indeed reduce your IRS audit chances, statistically speaking. However, once you decide to hire a true tax professional (and not one from AL), you will discover that your $1,500 tax preparation price without a partnership suddenly turned into a $3,500 price with the partnership. Whatever prices are offered by your chosen CPA, expect them to double with a partnership. Is it worth a reduction of an already very small probability of an IRS audit? Not on my planet.