All Forum Posts by: David M.

@Roberta Marcos Marcos

Once you have some rents.... rentals income/investment is considered passive income by the IRS. Basically,

1. If you are a Real Estate Professional you can deduct everything because it’s considered Active

2. If your modified AGI is less than $100k (married filing jointly) I believe you can deduct up to $25k and as your mAGI goes to $150k it becomes zero. To qualify to also need to “material participation” rule which is basically the 750 hours

That’s the basics of it from memory (I have spreadsheets for this nowadays). You should consult with a cpa for details how it applies to you. There is another relatively recent thread, something like “... underwhelmed by rental tax deduction” that has a good deal of discussions on tax benefits of rentals

Good luck

@Jonathan Smith

Probable best is to look up on Kelley Blue Book. Just remember to save a copy of the valuation for your records.

I'm not a cpa, so let me ask you... why are you trying to transfer ownership to your LLC? I guess what sort of liability is worth doing that since the deductions are the same and I figure the auto insurance must be more since it's commercial? I assume you'll have to pay more at the DMV for commercial plates (I don't know how whatever state you live in works...). In NJ you then have to put signage on the side of your vehicle.. just seems like a big hassle when starting off. Thanks in advance

@James Charmello

Yes, they are basically telling you that the property has at least some deficiency that would prevent you from getting a conforming loan. For example, bad septic, underground storage tank, etc. remember the property has to be able to maintain a CO and be livable (broad brush concepts) otherwise why should the lender underwrite the loan?

@Kevin DeMaio

To add on, FHA's mortgage insurance is for the life of the loan. So the usual method is to refi shortly after, and some lenders will refi you for free if the originated the first loan

For a conventional mortgage, I thought you could do less than 20% down (and have mortgage insurance) for an investment property. Haven’t done one of those in a while so maybe refs have changed.

@Mike Chira

Regarding opportunity zones, can we clarify what you mean by "profits?"  To mean, "profit" is some sort of business gain from a business operation.  I thought Opportunity Zones allowed you to defer a "gain" on your investment.  That is, buy a real estate property (versus some fund) in an Opportunity Zone, make the IRS election, then depending on when you sell (i.e. 5yr, 7yr, 10yr),you get/take the associated tax benefit on your capital gain.  I've heard of anything regarding operational "profits."

Perhaps that is the disconnect with your CPA???

Just my 2 cents...

@Dave Foster

Can you clarify the ending of your post:  "...slowly rotating portfolio of 10-15 properties?"  Was that to mean doing your suggested buy, fix, rent, refinance, re-evaluate is the 10-15 slowly rotating over properties?  If so, I'd definitely agree that is a potential model.

Not to hijack this thread, but what are you thoughts on using a C Corp tax structure for active fix and flips?

How does your model work with the 1031 exchange in terms of "auto-expanding your portofolio?"  Let me explain.  From my understanding, you need to take all the proceeds from the sale of the first property and purchase another property (or whatever for like-kind).  If you don't, you get taxed on the boot.  This includes the mortgage amount.  So, if you are using this in lieu of active flipping, one fixed property becomes purchasing 2 fixer-upper properties, which becomes selling 2 renovated properties to purchase say 4 or 5 fixer-upper properties, and so on...  Does my confusion make sense?  Thanks.

@Mike M.

While @Andrew Postell can speak for himself, if I understand him correctly, I think what you have heard is other, non-real estate investment businesses having problems getting 'business loans' for their operations.  These loans differ from a mortgage-type loan, a loan secured by real property, where the commercial lender is looking at the income production or after-value-repair of the real property.  For a non-investment business to get a loan to purchase equipment, there is nothing securing the loan so the lender has to evaluate the risk differently.  Make a bit more sense?

@S Cutsail

Have you looked into REIA's Professional Housing Provider (PHP) designation?

@Thomas Q.

If you don’t mind, let me give you my point of view from a smaller scale investor. I dont really get the point if depreciation since during the sale, depreciation recapture has you pay tax on everything you deducted, it now in one huge lump sum. Sure, you are trading active vs capital gains tax rates and if you defer the gains using a 1031 exchange this all makes more sense. Like I said, small scale investor.

Otherwise, I think it's all what the numbers say to try to answer your question. Without knowing what market area you are working in (and knowing something about that market) not sure. Condos would be beneficial for cost serration but if the HOA are high and/or the rents are low then it obviously wont make sense. You need to determine what form of investment maximizes your return in the manner you find acceptable. Then, either weigh how cost segregation benefits you or apply the cost segregation directly in your calcs.

Also, I think fixers may not suit your cost segregation purpose since if you did a good transaction, you uodates should be adding value. But, it’s a head scratcher: why wouldnt you buy something under value and fix it up to greater value instead of spending more money for a turnkey type property ... to max cost segregation ? See what I mean?

Also, take a look at I think is Sec199 depreciation. There is a relatively new depreciation rule allowing businesses to depreciate something like up to $1M upfront. I saw it before a year or two ago when I was researching business stuff, ie depreciating $1M in capital equipment. So, not sure it applies to a real property. I’m sure a cpa on this forum can chime in.

I hope this helps. In summary, the deal has to make good economic sense first, then see how to be the most tax efficient. Otherwise, if you just want deductions, perhaps invest in a bad deal or, etter yet, do something good and donate a bunch of money to charity. I hope that better explains my viewpoint.

Good luck.

@Brit Hale

Practically, just get a large umbrella insurance policy. While having a LLC for asset protection would be preferred, on a smaller scale it's not affordable as you've pointed out.

Just consider the cost of the extra insurance the cost of doing business vs the extra cost of financing and maintaining the LLC. Don't forget once the property is owned by an entity, you'll need and attorney to represent you in all legal matters. You can't do an eviction or anything since you can't represent your LLC in court unless you happen to be an attorney.

Meanwhile, your liability should be controlled between your primary insurance policy and your umbrella policy (for single family residences). So, from this point of view the LLC isn't buying you anything in the smaller scale.

Make sense?