All Forum Posts by: Andrew Angell

@Andrew Angell

The reason why you're getting contradicting answers is what @Kory Reynolds mentioned: the answers to such complex questions are case-by-case, and even if you write another dozen paragraphs describing your business, it will not be enough for any of us to have a complete picture. 

Unless you get an in-depth consultation with a tax accountant specializing in real estate, you will probably keep getting these confusing answers.

And I will add to the confusion, for my part. 1099-INTs that you receive send the IRS a signal that this is "portfolio" income which is indeed a different category of income altogether. However, when you're in the business of private lending, this portfolio income is most likely reclassified as ordinary business income. Then it can be passive or nonpassive (no such thing as "active") depending on your material participation. So, under specific circumstances, you might be able to offset income from passive lending with syndication losses. 

No, there are no tricks but also no quick black-and-white answers, sorry. A very complex situation that requires an in-depth case-by-case analysis.

Hi Andrew - 

Taking this one at a time, for the LLC that holds a short term rental that you were able to classify as active / materially participating - there is no similar trick to use for the syndication. It works for the short term rental because of the amount of time you are putting into that activity to hit the material participation thresholds. The Syndication doesn't have this same option since you put zero working hours into it. The syndication is what it is - passive - and unfortunately there are no tricks to turn it Active in your scenario. Real estate professional status with material participation in rental activities is how one can end up having "active" syndication losses - but doesn't sound like the scenario you have.

For the lending, that to me does sound like regular old interest income - for IRS purposes portfolio / investment income, which is neither Active nor Passive - it is it's own bucket. Given you are using a loan from your life insurance policy, any interest expense paid as a result of loan proceeds that can be traced to the Lending activity could be (potentially) deducted as investment interest expense.  Any other expenses incurred related to the lending would be non-deductible lending expenses.  

The comment you have about doing some advertising to make it active - if your action has no real teeth and you are just doing it to try and meet material participation or some other kind of standards, typically the tax position itself has no teeth and would not be recommended. The action should have true economic ramifications and not just be for a tax position. Additionally, any change in status (active versus portfolio income) of your lending activity will have zero impact on the active/passive status of your syndication activity - they are still two separate activities that must be considered separately, even though they are held within the same LLC. Additionally, the change of your lending activity to active could potentially have an even worse tax impact due to potential exposure to self employment tax. Point being tax wise - the portfolio treatment of you lending and passive treatment on the syndication might not be all that bad.

There can be different activities within a single LLC that are classified as passive or active, for each it will depend on the nature of that activity. The classification of one activity within the LLC doesn't necessarily drive the classification of another activity in the same LLC.

For the syndication, given it is a rental activity, it would be per-se passive. It doesn't get turned into active just because you have other separate activities within the LLC. We don't get to work around the real estate professional rules just by lumping passive real estate into the same LLC as an active activity.

The lending is going to be very facts and circumstances dependent, and will likely depend on how you are going about this activity.  On one extreme if you are actively going out and advertising you have hard money to lend, working closely with investors, managing those deals, acting like a bank, etc - it could sound like you are in the trade or business of lending, making that active / potentially self-employment type income.  On the other extreme, you just happen to have a few associates in real estate that you lend money out in a revolving door and are not acting as a business in this venture - just purely a loan, then perhaps it is just portfolio interest income.  All of this also impacts the deductibility of related expenses on these lending deals (investment expense versus trade or business expense).  It is VERY facts and circumstances driven, so it is not surprising that you are receiving different answers - anywhere in the middle of the two scenarios and it will be a decision and position to be taken on the tax return.

 Andrew,

Use local brokers- they will get you the best rates. A couple of suggestions for that area are:

1. Melissa Keener with Allstate (They'll shop with FL Insurance companies)

2. Stallworth Insurance

3. Classic Insurance Group

4. McMahon and Hadder

The other nice thing about using a local broker- if something disastrous happens, you have a local person to speak with and get help/advice instead of a call center in Wyoming. (No offense, Wyoming!)  Good Luck!

I'm guessing Proper insurance won't cover your property. You could also try Steadily or Foremost Insurance, although I'm thinking the latter is not specifically a STR insurance company. Several months ago, I had connected with a local insurance company in Destin, although that quote was for a condo. Unfortunately, I didn't keep their info and don't remember their name, but you could check with some local STR insurance companies.

Hey @Andrew Angell, so they are both exclusive to Florida. Monarch was formed by the liquidation of FedNat and is very new, 5 years.

Tower Hill is a little shady. Am Best recently dropped their rating to B+. Lots of customer complaints.

So neither seems like a great solution, but I just did a cursory look. Tower Hill would be a no for me.

Monarch has a A rating from Demotech. That is a upper middle rating. A"" and A" are the top.

So if I had to choose, Monarch looks the best on paper.

https://www.demotech.com/compa...

@Andrew Angell happy to chime in.  I'm a tax attorney and owner of a tax strategy & accounting firm that specialized in real estate and deal with this all the time.  A few notes here to answer your questions:

1) If you check all of the boxes as a material participant, rent avg 7 days or less, will you be forced to treat this as "nonpassive"?  - YES - you don't elect your participation.  Think of it this way...you can't just choose to be a passive S Corp owner even if you materially participate.  It works both ways under IRC 469. 

2) Documentation - yes, this is key.  I posted yesterday about a recent tax court case where frankly the judge laughed at the taxpayers as they had no records then tried to make them up after the fact.  We have some clients where we need to prove they do NOT materially participate in their business' which is actually quite tricky and the IRS approaches this with skepticism. 

3) No, a MGMT LLC would not help you here.

Overall, let the facts dictate the outcome as you might be in a win/win here. If you are passive, it appears you have PALS that could be soaked up. If you cross the barrier into material participation, you could likely work with your team to take advantage of the STR strategies to offset S Corp income.

If you have any other questions feel free to post!