All Forum Posts by: Ashish Acharya

@Ana Shapiro Since the property was acquired through a 1031 exchange, you must ensure the same taxpayer who completed the exchange retains ownership to avoid disqualifying the tax deferral.

1. Transferring to a Single-Member LLC (SMLLC) – If the LLC is wholly owned by you, the IRS treats it as a disregarded entity, meaning it won't impact your 1031 status.
2. Potential Issue with Your Husband's Trust – If your Delaware LLC is owned by both your trusts, adding your husband as an indirect owner could violate the "same taxpayer" rule, triggering a taxable event.
3. Safer Approach – Keep the SMLLC solely under your trust or wait at least a year before transferring to an entity with different ownership to avoid IRS scrutiny.

For liability protection without risking 1031 benefits, consult a real estate attorney or CPA to structure the transfer correctly.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

@Josh Bowser Since you're 100% passive in the 24-unit deal and don’t meet material participation, the bonus depreciation creates a passive loss, which generally can’t offset active income like Realtor commissions. Even if you qualify as a Real Estate Professional (REPS), you must also materially participate in the activity or properly group it with your active rentals to use the loss against active income. Without that, the loss is suspended and carried forward to offset future passive income or gains. If your modified AGI is under $150K, you may qualify for a limited $25K passive loss deduction, but this phases out quickly. Talk to a real estate CPA about grouping or election strategies to potentially unlock those losses.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

@Tony Dinh Since your property is paid off, a HELOC offers flexibility but has variable rates, while a Home Equity Loan (HEL) has fixed rates—both are tax-deductible if used for ADU construction. A cash-out refinance may provide lower rates and longer terms, while a construction loan is tailored for major projects. If the ADU is rented, costs are depreciable, and mortgage interest remains deductible. Check California ADU grants for possible savings, and consult a real estate CPA to optimize tax benefits.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

@Sebastian Bennett If your intent was to flip, the IRS treats the property as inventory, meaning you can’t deduct rental losses since flips are taxed as ordinary income (not rental activity). However, if the intent changes and you convert it to a rental, you can start deducting rental losses, depreciation, mortgage interest, and expenses from that point forward.

Rental losses are generally passive and can only offset passive income unless you qualify as a Real Estate Professional (REPS) or meet the $25K active investor deduction (phases out at $100K-$150K AGI).

To document intent, keep records showing marketing efforts to sell vs. rental agreements to support tax treatment. If unsure, a real estate CPA can help structure it correctly to avoid IRS red flags.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

@Ardel ALegre Since the house is not under your name, you need to track your 50% share of purchase, rehab, and other costs to report the correct taxable gain when sold. Since your friend holds title, they will report the full sale amount, but to avoid being taxed on the total profit, they should either issue you a Form 1099-NEC, file a partnership return (Form 1065 with K-1s), or document you as a co-investor with a capital contribution agreement.

When sold, your taxable income is (50% of Sale Price – 50% of Purchase + Rehab Costs = Net Profit Subject to Tax). Since fix & flips are treated as ordinary income, profits will be taxed at your regular income tax rate plus self-employment tax if it's considered an active business.

For future deals, forming an LLC or partnership can simplify taxes and liability. A real estate CPA can ensure you only pay tax on your actual net gain.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

@Mason White If you sell your home after living there for 2 of the last 5 years, you can exclude up to $250K ($500K if married) of capital gains tax (IRC Section 121). With BRRRR, rental property depreciation reduces taxable income but triggers depreciation recapture (taxed up to 25%) when sold. House hacking allows deductions on rental expenses while keeping homeowner tax benefits.

HELOC or cash-out refinance interest is deductible if used for rental improvements, and mortgage insurance premiums may also be deductible. Long-term rentals qualify for depreciation and capital gains treatment, while short-term rentals (STRs) may be taxed as ordinary income unless you actively manage them. Your tax strategy should align with your investment goals—consult a real estate CPA to maximize deductions and minimize liabilities.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

@Fabian Escobar You only report income and expenses from November and December 2024, since that's when your LLC was formed. Any rental income or expenses from before November should be reported on your personal tax return (Schedule E) if the properties were owned in your name.

For tax filing:

• Single-Member LLC (SMLLC) – You'll report LLC activity on Schedule E of your 1040, just like before.
• Multi-Member LLC – You'll file Form 1065 (Partnership Tax Return) and issue K-1s to each member.
• If you elected S-Corp taxation, you’ll need Form 1120-S.

Be sure to keep separate records for pre-LLC and post-LLC transactions to avoid mix-ups. A real estate CPA can ensure a smooth transition and help you maximize deductions.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

@Yoni Udkoff If your friend lived in the home for at least 2 out of the last 5 years, he may qualify for the capital gains exclusion—up to $250K for single filers or $500K for married couples—which could eliminate or reduce his tax liability when selling. If he doesn’t qualify, here are some options to avoid or defer capital gains tax:

1. Convert it into a Rental – If he rents the home for a while, he can later use a 1031 exchange to sell and reinvest in another property, deferring capital gains tax. However, this requires holding it as a rental for at least a year or more to prove investment intent.
2. Seller Financing or Lease-to-Own – Instead of an outright sale, he could structure a seller-financed deal or a rent-to-own agreement, spreading taxable income over multiple years.
3. Offset Gains with Losses – If he has other investments with capital losses, he can use them to offset the gain.
4. Wait Until Market Conditions Improve – If he’s struggling to sell, renting to you short-term allows him to cover costs while waiting for a better market.

Since tax laws can be complex, a real estate CPA or tax advisor can help him determine the best strategy based on his ownership history, tax situation, and financial goals.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

@Jorge Caceres The key concern here is whether the transaction would violate the IRS rules regarding prohibited transactions for self-directed IRAs and Solo 401(k)s. These retirement accounts have specific guidelines regarding "disqualified persons," and engaging in certain transactions with them could lead to penalties or disqualification of the tax-advantaged status of the accounts.

Here’s a breakdown of the issues involved:

Disqualified Persons
Self-directed IRAs and Solo 401(k)s cannot engage in transactions with disqualified persons, such as the account holders, their spouses, parents, children, and entities they control. Involving any of these in the deal may violate prohibited transaction rules. Forming a

Syndication
You can invest your IRAs and Solo 401(k) in a syndication, but ensure no disqualified persons are involved in the management or decision-making, as this could trigger prohibited transaction rules.

Potential Issues
Self-dealing (personally benefiting) or indirect benefits to you or disqualified persons from the investment would violate the rules.

What You Can Do
Ensure the syndication investment doesn’t involve self-dealing, and no disqualified persons influence management or decisions to prevent personal gain outside the investment returns.

Key Recommendations
Consult with a tax professional or advisor experienced with self-directed accounts and real estate investments to avoid prohibited transactions.

@Steven Prinster In a 1031 exchange, any cash you take out at closing (boot) is taxable, even if it’s reimbursing improvements you made before the sale. The $30K you spent on improvements is added to your cost basis, meaning it reduces your taxable gain, but it doesn’t change how the exchange rules apply.

If you profit $50K, the full amount must be rolled into the replacement property to fully defer taxes. If you pull out the $30K, that portion will be taxable as boot, even though it wasn’t part of your "capital gain."

How to Structure It Tax-Efficiently:

• If you want to avoid taxes, roll the entire proceeds (including the $30K) into the replacement property.
• If you need to recover the $30K tax-free, you could try a cash-out refinance on the new property after completing the 1031 exchange.
• If you pull the $30K at closing, expect to pay capital gains tax on that amount.

A real estate CPA can confirm the best approach based on your full tax situation, but if full tax deferral is the goal, keeping all proceeds in the exchange is the safest bet.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.