All Forum Posts by: Alan Rohrer

@Nate Morris

It would make sense that the deal may need to be included in a separate sale.

Generally when purchasing property, you want to weight more of the value into items with lower depreciable lives. So if you are purchasing a house with land, you typically would try to allocate more of the price to the house, as you don't take depreciation on land.

If your goal is maximum taxable writeoffs and you have a number of other properties, you may want to look into cost segregation (but it won't be worth it if you only have this property).

Keep in mind that when you sell the property, you'll have to pay tax on the depreciation (usually a 25% rate).

Be sure to chat with a CPA about allocating the purchase price in a sale, as you need to follow one of the multiple acceptable ways to allocate.

Also, depending on how the rest of your portfolio looks and your timetable for holding, being less aggressive in allocating the purchase to high depreciation items may work out better. 

Let me know if you have any more questions!

@Anthony Emtman hit the nail on the head. At your size, if you are looking to maintain your company as-is and are comfortable with your portfolio, I would recommend leaning more towards a bookkeeper. It will likely be worth it to pay for someone who is familiar/specializes in real estate.

However, if you are looking to scale your company, a strategic advisor will be crucial. Someone who manages your books, advises on investment and tax strategy, and can help you systematize your business will be what you need.

Hiring a controller a CFO will likely pay for itself, but at your size- a full time controller or CFO would probably be out of budget.

Do a search here on BP for CPAs that can act as an outsourced CFO or controller. They'll take care of your books, all compliance, tax prep/strategy, and help you build out and automate your accounting systems.

Please make sure if you go the outsourced CFO/controller route- do not hire someone who bills by the hour.

You want them to value effectiveness and efficiency over time... plus, you're buying results, not time.

Once again- right now, you're probably good with a RE Bookkeeper, but if you continue to grow, start looking for an outsourced CFO/Controller.

@Ameya Barve

Before you spend time contacting and connecting with the people on your list (which is a great list btw), I'd recommend connecting with people here on BP or at your local real estate investor meetup. 

As much as the people in your list above are essential, what is more essential are individuals who are currently doing the type of investing you want to do.

Putting these people on your team first as mentors will help you put your best foot forward when you pull the trigger on the first investment.

These mentors can also give you advice on the best contractors to use, agents to use, and CPAs/Tax Advisors. Connect with your local community and add value however you can while you learn from them. I think this is your best first step to building your team.

Best of luck as you start out investing!

@Damian Howard

You say you should have used a CPA... well you still can (although you won't find a good one able to do your return right now).

If this is the way you want to go, file an extension and find a CPA after tax season is over.

Remember- you need to still pay the required taxes by the due date along with your extension. You could use the tax prep software you started with to calculate your tax liability based on the numbers you put in (this may not be the same number the CPA comes up with though, as it's likely something is overlooked).

But this way you are sure it is right in the end, and you are able to use a CPA.

Hope this helps!

@Sridhar Ramakrishnan

@Johnny Borrelli is correct - See #3 from @Dave Foster's post. This is how you would sell your assets and move them into a more passive class while deferring capital gains.

@Greg Kendall

The Capital Gain will be your selling price minus your basis.

Your basis = purchase price PLUS capitalized costs (which would include many of the costs incurred to get the property to "in-service" condition...loan origination costs, closings costs) MINUS depreciation taken.

And you are correct- the amount you owe is not factored in, although certain loan costs and interest can be either capitalized or expensed.

Also @Andrew Reyes brings up a great point- if you intended to sell this property after you had rehabbed and placed a tenant, you may be seen as a flipper and the gain could be taxed as ordinary income.

Andrew also mentioned that holding for 2-years will help. This is more of a "safety net"/conservative approach than a requirement (as Andrew also correctly pointed out). Your intention matters a lot here- be sure to talk with a real estate CPA who knows your entire situation.

@Cathleen Blackmon

Debt Service Coverage Ratio is a measure of how much cash flow are you getting in comparison to your monthly loan costs (how well can you cover your debt service costs). Obviously the more cash flow you have in relation to your loan payment, the less risky this will be to a creditor.

I will say that the BRRRR method poses the risks you talked about above. As is typical in real estate- the price you pay for the property is crucial. Although being invested in real estate is great, it's not worth jumping into a sub-par deal.

Hopefully you can get this worked out!

@Michelle R.

As you could imagine, with a 180 day period to close (half a year), this situation would likely pop up a lot.

First, be sure to talk with a tax advisor / CPA that knows your whole picture before you make any decisions (as there may be something I'm missing from your post).

But generally, if your funds in 2017 went to a qualified intermediary, and you had the full intention and ability to complete a 1031 exchange before the applicable deadlines, but weren't able to complete- the sale could be treated as an installment sale, and taxed in the year you received the proceeds (2018) from the qualified intermediary (when they paid you back the money they were holding).

Now- if you had any gain due to debt relief, or had any depreciation recapture, this would generally be taxed in the year of the sale.

I'd recommend hashing this out with your tax advisor/CPA as amending your return after the filing deadline if you end up owing more tax could cause you to incur some interest and penalties. You could also extend and file when you know for sure.

Hope this helps!

**Update** Looks like @Dave Foster also replied while I was crafting my message, and I will second what he wrote!

@Rebecca Styer

@Jacqueline Gardiner is correct- purchasing the property for $1 would trigger a massive tax liability upon eventual sale... and inheriting it would likely produce no tax liability. I have worked with many clients in a similar situation and usually knowing this pushes people to wait.

However, if you father really wants the property out of his name, there are ways to minimize the tax liability:

1) He probably paid way more than $1 for the property and the net book value of the property (money put in minus depreciation) is likely way more than $1. He would only be taxed on the gain- so if he bought for $100k, and took $20k of depreciation, a sale for $80k would not result in a taxable gain.

2) There's something called an "installment sale" which basically spreads out the purchase over a given period of time, and thus spreads out the capital gains taxes as well.

There are some creative ways to minimize taxes, but none will likely be as good as just inheriting the property. 

I may be missing something from the info you provided, so be sure to meet with a CPA who specializes in real estate. He/she should be able to recommend a few options using your actual numbers with a full picture of your situation.

Best of luck, and let me know if you have any additional questions!

@Step Stheph - Great job asking the question. Many people wouldn't think about the tax implications of this until after the sale...and you're on the right track.

Selling land that you developed would qualify you as a "dealer/developer" and the whole gain would be ordinary income and subjected to self employment taxes. Obviously this is what you want to avoid.

The general strategy would go something like this:

Sell land to S-Corp. This structure will let you capture the capital gains on the land thus far without it triggering capital gains taxes (assuming you don't trigger any of the limitations on the sale of your personal residence, or the gains are more than the exclusion). 

Developing the lots and selling them as an S-Corp will allow you to avoid some of the SE taxes as well.

The amount you sell the land to the S-Corp will be the cost basis of the "inventory" (the lots). The building costs will be added to this inventory and will be tax deductible when you sell the property.

However, you shouldn't do this yourself:

Setting up the legal entity should likely be done by an attorney that has experience with your local laws and these types of transactions.

And talking with a real estate savvy CPA will help you avoid making mistakes you can't go back on. They'll also be able to help you determine reasonable compensation (an important aspect of S-Corps), and also help you with the cost breakouts of the sale.

Please note that I don't know every detail of your situation, so the strategy I mentioned may not completely apply to you. Be sure to talk with your CPA and Attorney who know your entire picture before actually starting any of this.

Best of luck!