All Forum Posts by: Austin Cheatham

Hi, you've definitely came to the right place for an REI focused tax professional. While we aren't allowed to self promote on the forums, I'd recommend looking around to see who is providing value and reach out to see if they are accepting clients. Tons of good resources here!

Just thinking in a different direction to make it simpler. Assuming the S Corp is an LLC, could you consider keeping the properties in the current entity and revoking the S election? Could save a lot of trouble and be accomplished relatively easily. If there's other activity going on in the s corp then that's a different story of course.

So typically depreciation and expensing of costs usually happen on the placed in service date. So let's say you spend $50,000 over the next 6 months to get this property going. That 50k will be capitalized until the date it's available for rent, and then we would start expensing. That doesn't have to be 1/1/25, it can be 2/23/25 or whatever date in 2025 you place the asset in service. 

Now there can be some exceptions for expensing certain carrying costs, but without knowing specifics it's hard to say at this moment. 

Hopefully that answers your questions, but feel free to reach out with any specifics if i can help!

@Geoff Prickett Just sent you a quick message!

I think it depends on your goals here and this is likely more of a legal question than it is a tax question. Dependent upon the profit of the business, one idea you could run is an S Corp for operating side and an LLC for the real estate side. This sets you up for succession planning as well, if you ever wanted to sell the gas station operations but maintain the real estate for the passive income that sets you up to do so easily. Rather than have them all in one corporation/LLC.

Happy to discuss your goals or plans if you want to reach out!

As a general rule, real estate shouldn't be put into an S corp or a C corp. There are tons of disadvantages to real estate in an S corp.

Also, one main caveat to an S Corp is requiring to pay yourself/shareholders on payroll. This payroll has to be a reasonable salary for what you will be doing. Sounds like property manager, so you would need to research market salary for PMs in your area. Lets say this number is 50k. Minimum you would need to generate enough income to pay yourself that salary, as well as cover all of the payroll taxes, other expenses, admin burden of payroll, and still generate enough of a return to take distributions. This can be a pretty significant administrative burden as well.

What you will likely want to look at forming is just a multi member LLC, taxed a partnership, with a manager (you) and draw out the terms in an operating agreement. A real estate professional is allowed to take rental losses against ordinary income. So you could use your rental losses against your active income from selling real estate. That typically isn't allowed for a non RE pro (with exceptions/limitations). Your partners likely wouldn't be allowed the losses unless they are RE pros as well. They would need to consult with their tax advisors.

Yes bonus depreciation may apply. I would recommend a cost seg study immediately after purchase to take the benefits of bonus as is and then look at doing a cost seg after renovations to take the benefits of bonus on renovations. 

Downpayment isn't straight deductible as it is just built into the basis of the property since it is part of what you pay for the property. It would technically be depreciated with the actual property itself. Closing costs and HOA fees can be expensed. Furniture could be, it depends on the cost.

Happy to work through any issues or scenarios or run some numbers for you. Feel free to reach out!

I would advise against using the 401k to pay off your loans. Typically the 401k withdrawal for this would incur a 10% penalty on top of normal income tax. With it sounding like a substantial amount, you could be looking at paying 45% in taxes on that money (10% + 37% tax bracket). Nearly half of your money eaten into by tax. 

If you are dead set on this, I would recommend pulling the money out in phases. Possibly year over year to help lower than tax burden but you will still likely incur that 10% penalty. Feel free to reach out if you'd like to discuss or run some numbers on the situation. Always happy to help!

 No worries, always here to help. Never hesitate to ask. Thank you!

Awesome, got it. Generally with a revocable trust it would not need to file a separate tax return while you are living. The trust would likely go into effect after your death and then would require filing of its own tax return and things of that nature. Most of this would depend upon the trust documents and how it is setup but generally you would not need to file a trust return right away. We work with a ton of investors who own trusts and have real estate and other assets inside those trusts. They can get complicated from a tax perspective after your death so I would be sure to make your tax professional aware of the situation and make sure they get copies of the trust documents for planning purposes.

Glad you are thinking ahead and planning to maximize your tax situation. What I would do is go ahead and coordinate with a tax professional and a cost seg professional to be sure you have your ducks in a row.

If you are planning on doing renovations, it is possible you could have two cost segs done to maximize deductions. You could look at doing a cost seg pre-renovation and post-renovation to be sure you capture the maximum deductions for the initial purchase and for the upgrades both. In this case the cost seg guy will likely need to look at your property both before and after purchase/renovation. I have worked with several clients in this capacity who had both cost segs completed and it resulted in significant tax savings.

Be sure to consider your income for that year and how much depreciation you take. It may not be worth it to take all of the bonus depreciation and to elect out on some and save for the future.

Happy to recommend some cost seg guys or help with running any numbers if you need! Feel free to reach out.