All Forum Posts by: Art P.

@Daniel Han

Not much to add, @Natalie Kolodij answered your question well. If you make above the $150k AGI you wont be able to use the small taxpayer exclusion. The only way for you to change that is to contribute more into your 401k or pretax deferrals that qualify as a reduction to your AGI and wont bring your MAGI at or above the qualified limits.

Your other bet is to become a real estate professional to deduct all passive activity losses if you meet the two tests of 750 hours for the year and working 50% or more in real estate activities. I wouldn't quit your day job, but finding more tax cash flow positive deals to offset your passive activity losses.

@Jay Hinrichs

Pardon my ignorance, but what do you mean by fake lenders? Those that string you along and back out of the funding last minute or flat out scammers?

@Eamonn McElroy

Good point. The answer to his question is regardless of which method he chooses to take to get paid, either his personal or his disregarded LLC, the impact on his personal return is the same as @Wayne Brooks mentioned.

@Navid A.

Normally you use the operating agreement to determine how to distribute proceeds on flips. As @Wayne Brooks mentioned there aren't too many ways to mitigate flip income. Your only tax burden mitigation would be to receive money on the deal as a gift since you are not a listed partner on this flip, this would force the tax burden on your partner both in SE and income taxes. You can potentially get assigned the property and wholesale it to make the agreed upon money from the deal also reducing your partner's sales price. Either way you structure it you are subject to SE and ordinary income tax. 

Sales price = 200k
partner's basis = 130k

You want to split profit 50/50, he assigns the house to you for 165k and you sell for 200k. He makes 35k and you make 35k profit on the deal and are both subject to SE taxes and ordinary gains just different ways it was derived. Then going forward you can set up a more formal agreement. You can adjust to recoup expenses paid into the business.

The other way is for your partner to gift you the proceeds you are owed for your participation. He calculates what the net income would be after tax and splits your after tax portion as a gift (up to $15,000 tax free) and he takes the taxable hit for the full ordinary gains. 

Unfortunately I don't have a recommendation for you in San Diego.

@Eamonn McElroy @Michael Plaks @Ashish Acharya

Do any of you have recommendations on any RE CPA/EA in the San Diego area?

@Eric Bailyn

There are plenty of variables that need to be considered given you and your mom's financial situations and what makes the most sense. There is no one size fits all and multiple factors should be taken into consideration. 

The most tax advantageous solution is to inherit the house from your mom on a stepped up basis.

If your purchased property has appreciated and you are taking the home sale gain exclusion and have no additional capital gains above the limit, you can set your basis on the property (consider property taxes on the price paid). If title trades hands, the county could reassess the home to market value and you may be paying double the property taxes your mom was paying on her own. 

I would sit with a CPA and run through multiple scenarios and how it will impact your cost, basis, gift exclusion limits, and estate planning. 

Another option is to keep the property in your mom's name and formally loan the amount needed to your mom to make necessary capital expenditures, she will only be assessed the additional improvements based on permits pulled to keep it below assessed market value decreasing property taxes. When she passes (hopefully not any time soon), you step up in basis in the property at whatever the market value is at that time. 

If you buy the property from her for $555k, as you mentioned she is single, she can max out the home sale gain exclusion (305k basis + $250k exclusion) to effectively pay no capital gains. This does increase the assessed value and increases property taxes paid going forward. You may also increase the assessed value when you make the improvements at a later date. But at the $555k basis + $350k in additions/improvements, you will need to hold it until the property is valued at $905k before you recognize capital gains. Personal property does not benefit you at a loss.

As you can see there are multiple options to consider, if you get the sale through, you can tax plan with trusts to move the money she wants to gift you over time, or she can gift you the full amount using the life-time gift exclusion limits without you having to gift any back to her.

@Eric Bailyn

There can be tax implications to both her gift to you and your gift to her. Essentially this is a related party transaction. If she gifts you the property instead of you inheriting the property from her, you will take on her basis in the property (additional capital gains when you sell the property). If you or your mom don't elect to use the life-time gift exclusion, both you and her will be assessed a gift tax in the year the gifts take place.

She can essentially gift the property and fill out form 709 for the amount over the gift tax exclusion amount ($15,000 per individual) that will be reduced from her life-time exclusion amount of $11,180,000 (in 2018). 

You can do the same back to her with the $475k and reduce your lifetime exclusion, but you are affecting the total tax free amount that your estate can pass onto the next generation or whoever may inherit it.

This is a great question for your CPA and attorney to tax plan. There are creative strategies that you can execute to limit the effect on the life-time gift exclusion amount related to the scenario you proposed.

As an alternative, you could buy the property from her for $475k (this may increase your basis) if hers was lower, this will still trigger a gift tax for the difference because of the related party nature of the transaction being sold substantially under market. Your improvements will increase the basis in the property.

@Eric Horvat

As @Brian Van Pelt alluded to, this would be a related party transaction and would be scrutinized by the IRS. Unless you plan to buy the property from them at around market value, you may be subject to gift taxes if you don't tread carefully. 

If you are planning on staying at their rental house during that time, you can help them out by paying the rent during that time. Remember to make sure that you do the following: Get a lease agreement, are charged reasonable rent, and they take only reasonable expenses related to the rental.

If you want to get into the market, I would recommend buying a rental yourself, or partner with your daughter on the next deal. Investing in a property that you will be living in while splitting ownership will complicate the situation come tax time, and may disallow passive activity losses for your daughter.

It is definitely possible to structure this deal to potentially work, but will require a lot of consultation to make sure all your i's are dotted and t's are crossed if you happen to be selected for audit depending on how the invested property is used (rental activity (schedule E) vs itemized deductions(schedule A)).

@Brian H.

That service would probably fall under consulting for a REI CPA/EA. This may happen if you are trying to get a fresh look at how your existing tax return have been prepared, and if everything available that is tax advantageous is being taken by your current Tax preparer.

Every CPA/EA works differently, as many tax professionals on these forums will recommend, talk to a few different REI specialists on here and see who you think might have the best personal/professional fit to perform the services needed.

To answer your questions:

1) Is it reasonable to just give my 2018 tax return to an REI-focused CPA and pay them to just comb through it and see if it looks good or if they would have done things differently?

Yes

2) Can I expect an unbiased answer since they know I have a CPA that I would likely stay with if it turns out they know all the little extra bits that help us out in REI?

Generally yes. As you will be paying for the review service to determine whether there is any additional value add, you most likely will get an unbiased answer.

@Christopher Fraze

To clarify, you need to meet two factors:
1) More than 50% of the personal services you perform in all businesses during the year MUST be performed in a real estate business you materially participate.
2) You must work at least 750 hours in a real estate trade or business.

If either you or the spouse qualifies as a Real Estate Professional then you will be permitted to deduct all passive activity losses from your rentals against ordinary income from whatever sources derived.