All Forum Posts by: Aus Smith

Hey,

Along with the good information you have received, I'll chime in with my thoughts. 

A good way to avoid this in this future is to use a vendor worksheet/package that request the pertinent contact information along with a document request for the filed out W-9, copy of business license, Worker comp and liability insurance certificates. When you engage with a new vendor, have it be a standard procedure that this worksheet or packet be filled out with documents provided before you will engage their services. If they say they do not need to fill out a W-9 as they are exempt from 1099's being a corporation, then they still need to provide a filled out and signed W-9. They need to understand that the W-9 is the way that you can document the communication that confirms their business entitles structure as a corporation. This will standardize the workflow for engaging new vendors. 

Of course, we do not live in a perfect world though. Not everyone is going to be voluntarily compliant to this request. 

Good luck with your endeavors! Cheers! 

Quote from @Adam Bartomeo:

1. We are not allowed to say if there is an industry standard as this could be viewed as collusion. 

Thank you so much for the information!. 

To be clear, I am not looking for this information for my work. I have a side business doing tax returns for real estate investors and property managers. This information is purely education to help me understand the income section of a property management profit and loss. I want to understand all fee structures to assist in the income reporting analysis. I only was asking for a standard to see if there was a common structure that I would probably prioritize learning over the other. 

I have considered doing the CPE for property managers under NARPM, even though I have no intentions of becoming a property manager.

Would that be a good idea to help wrap my head around the various fee structures? 

Also, do you reconcile your management income to check to see your charging what is stated in your management agreement? 

Again, thanks for the information.

Thank you! 

Hey All, 

I am a CPA who works directly with Property Managers. I have worked full time as an accountant for a property manager for the last six months. I am looking for information for contracts between owners and property Managers. I am looking for information for common clauses used by property managers. I am also looking for information regarding fee structures, and what item's that should be and should not be included in the management fee calculation. 

If anyone has information directly on the following questions, I would appreciate any information. 

1. Should the management fee be collected on rent charges applicable to utility reimbursement, and/or the the rent charges to account for utilities directly baked in, and included in rent? I know this may be company specific, but is there an industry standard?

2. Is it industry standard to use Passthrough's, as the fee's collected for certain item's are simply collected by the management company, then paid directly to the property management company, making the transactions net to zero for presentation? You could report the income, and the management fee, but the net amount reported would be the same, and only presentation of the profit and loss would change. This seems more of a preference item on reporting, but I wanted to get more insight on how these transactions are structured. 

Any internet resources and books that go in depth on these concepts would be very helpful! 

I usually hang out in the tax section, but I'm really interested in gaining more knowledge on the industry of property management. Thanks in advance to anyone that can help! 

If this is in the wrong board, please let me know! 

Austin L. Smith, CPA

Hey Everyone, 

I'll chime in with my perspective on the answer provided by the accountant. 

I first want to emphasize to real estate investors, the difference between the tax treatment of rental income derived from an active trade or business compared to investments. You typically will determine if your rental activities are considered an active trade or business under I.R.C. § 162. Rental income that is treated as business income, can be converted to non-passive income if one of the 7 material participation test are met and the taxpayer qualifies for Real Estate Professional Status. Under the Passive Activity Loss Limitations, rentals are automatically considered passive income unless the provisions listed above are met.

However, investment income has its limitations on what tax benefits can be applied. For example, Investment income would not qualify for the home office deduction or the section 179 deduction. These deductions are meant for activities considered active trade or businesses. The taxpayer will be able to qualify for the $25,000.00 special allowance deduction without qualifying for real estate professional status, under a certain MAGI, and this would be phased out at 150k Married and 75k Single. 

On its own, opening up an LLC or partnership does not in itself prove that you are treating your rental activities as an active trade or business. Along with this activity, an operating agreement should be signed, a board of directors/ advisors should be formed, and board meeting should be held along with minute meeting notes being taken. Opening the LLC or partnership would only make it easier to prove that the activity is being treated as an active trade or business. The reason the 1% ownership is being suggested, is that this would change the tax treatment from being reported on schedule E as a disregarded entity, to being reported on Form 1065 as rental income reported from form 8825, and then this would passthrough to the individual taxpayer on form k-1.

There is a difference between the tax treatment of non-passive income, vs passive income, compared to business income vs investment income. The tax preparer may be confusing the two. 

Yes, the partnership income would passthrough as business rental income, but that does not mean that it wouldn't automatically qualify as a passive activity as a rental under the PAL limitations. You would still need to qualify with material participation and Real Estate professional status to convert this income to non-passive. Also there is a difference between active participation and material participation.

I hope this helps!

Austin L. Smith, CPA 

Hey All, 

This is the exact question I was looking for an answer too. The best answer I found was looking at it from a tax and legal perspective. From a tax perspective, we have both section 1245 and 1250 assets. From a legal aspect, 100% of the assets is real estate property, regardless of how we look at it for tax purposes. Therefore, amounts separated for by a cost segregation study would not technically increase the "non-real-estate-property" for the purposes of the 15% test. The argument against this though, is that the audit technique guides suggest that the 1245 asset components have to be 'personal property', aka movable assets. Movable assets suggest they are 'non-real-estate property". Contradictory and perhaps more of a tax and law question in itself. Interested in getting more familiar with the legal realm myself anyway. 

I can understand the perspective, but I am not satisfied with this answer myself. If I remember where I found it I will share. I would say that any reduction of 1245 assets in a 1031 exchange with a cost segregation study would constitute boot, and the 15% rule should be considered. I am still not 100% on how it should be applied though. 

Thank you all for sharing your answers! I really anticipate to see the detailed response from Michael once he has time. I had the same realization as Michael when considering section 1245 assets in a 1031 exchange, and I really have been looking for a concrete answer ever since. 

Again thanks all and Cheers! 

Quote from @Michael Plaks:

Third, here comes the bad news: you cannot generate tax losses from renting rooms out of your own (or your daughter's) residence. If your HRB guy tells you otherwise, then you know that you need to upgrade.

 Completely agree with this answer! I would take the same approach myself. 

Austin L. Smith, CPA 

Quote from @Benjamin Weinhart:

 Hey Ben, 

I reference my old boss because I have never seen this practiced myself. I would imagine most of the time the bloated returns are a result of not suppressing unnecessary pages. However, I have seen a simple return with supplemental documents that are simply blank that should be supressed. I assume a tech savy tax pro would not come across this though. I agree that all carryover data should be provided regardless of how bloated the return is. I usually have to request at least one or two omitted documents for carryover data such as depreciation schedules and what not.

I am pretty happy when provided this information from prospective clients beforehand, so thank you for considering future tax pros when providing your tax preparation! 

Cheers and thanks for the reply! 

Hey, 

To add to my fellow accountants, size does not matter. The first CPA I worked for told me that tax preparers who are unconfident would print every page generated by the tax software, to make a return look bigger even though it was bloated with unnecesaey supplemental sheets that provided little to no value. He called them stocking stuffers, because the client would file those pages away and never see them again.

You would not believe how large a small return would look like with these printing options.
Fun question. Thanks for providing me the opportunity to provide my perspective. Cheers! 

Austin L Smith, CPA

Hey, 

It is important to remember that as a flipper, you will not be working with capital assets, but inventory. Sale of inventory is subject to self employment and ordinary income tax. 

I find it easier to look at it at the perspective of inventory. 

Good luck getting into house flipping and finding profitable deals. 

Cheers. 

Austin L. Smith, CPA