All Forum Posts by: Austin Cheatham

It depends on the location of the rental and the specific state and local laws and license required. Some localities have gross rent floors that you have to hit before requiring an occupational license. I'd recommend reaching out to a tax attorney or accountant to see if they can provide you some insight. This is very state and local specific to the rental location. 

Also adding in here for anyone else viewing that we would need to consider the possibility of the IRS classifying this as a second home versus an investment property and disallowing any potential 1031 exchange due to allowing a family member to use the home rent-free.

There are safe harbors to qualify for a 1031 exchange. The safe harbor requires the Exchanger to have owned it for twenty-four months immediately before the exchange, and within each of those two 12-month periods the Exchanger must have 1) rented the unit at fair market rental for fourteen or more days, and 2) restricted personal use to the greater of fourteen days or ten percent of the number of days that it was rented at fair market rental within that 12-month period.

Fernando,

It could be time to search for a new tax professional, but without knowing your full situation I can't say for sure. I would recommend having someone who not only provides tax advice but also acts as a strategic advisor. Someone who is helping plan your tax situation and your short and long term goals. There are several ways to offset income, even with positive cash flow. There are situations where we could have a paper loss but still be able to show some cash flow, which is ideal.

One of the downsides to selling property 1 is the potential for depreciation recapture and capital gains from any appreciation. However, we can negate some of that with a 1031 exchange which would allow you to take those gains and reinvest it into a better deal. When it comes to my clients, I like to run through different 1031 exchange scenarios to see what we can do to provide the maximum benefit of deferred tax and also be able to achieve what we want to do. Whether that be a partial exchange to pull some cash out or a full exchange to invest into a better deal. It will just be important to identify the new property and make sure you stay compliant with 1031 exchange guidelines.

If you have any questions on the tax piece or need any help analyzing the numbers, feel free to reach out. Happy to help if I can.

Hey John,

Not an attorney, but an experienced accounting professional with some experience in these areas. It sounds like you need a fully comprehensive package when looking at the legal side of things. From what I have seen, typically LLC formation with articles of incorporation and an operating agreement do not include passing on to heirs. This is sort of a separate matter, usually things like that are best handled through estate planning. I would consider reaching out to some real estate attorneys either here on BIggerPockets or something local to you area. I would let them know you are interest in forming an LLC treated as a partnership and that you are looking to do some estate planning to see if that is something they can help with. I have some local to me that I can recommend if that helps.

From an accounting side of things, I would look for an accountant who specializes in real estate investing. I would vet them out and ask them questions about different real estate topics and see what they have experience in. See what other clients they have and what they are doing with those clients to understand what they offer. You could say something along the lines of "I am looking for a RE focused accountant, is that something you offer? Do you mind giving me some scenarios you've been through that might apply to me?" I would find someone who has been through 1031 exchanges, understands cost segregations, and depreciation rules. Note, they do not have to perform cost segs, but at least be familiar. Often times cost segs are referred out separate to the actual tax prep.

Do not be scared to work with someone virtual, plenty of our clients reside in different states and we are still able to support them the same as the others. Technology has really come a long way.

Happy to help and provide recommendations in either of these areas. Feel free to send me a message if you want to discuss further!

Welcome to the journey! Remember, investing is a marathon, not a sprint. 

My only advice is be sure to sync up a real estate tax professional before you get too far in. This person can really help you build a foundation for your investment journey. Having someone who understands the ins and outs of real estate tax law can make or break your investments. Imagine costing yourself a $10,000 tax bill because you weren't working with the right professional. Being able to strategize and plan out each piece along the way can really help you save money and build up those investments faster.

Have fun along the way and best wishes to you!

Congratulations on the growth! It's great that you are looking for an accountant early on. While finding a tax professional who is local can be ideal, sometimes a remote tax professional can service you better than someone local. Often times you can find a more specialized service when working with remote tax advisors who specialize in real estate tax law. There are several on this forum, so feel free to reach out to some to see if you can find the best fit! 

Best of luck in your search!

Few different things going on here. 

The condo proceeds from the HELOC used as a down payment will not be taxed.

The tax will come into play when the condo is sold. You'll pay capital gains tax on the gain on the sale. The capital gains would be based on sale price less basis. Which sounds like a 95k gain.

And yes, when the condo is sold you could opt to do a partial 1031 exchange with those proceeds and keep some for yourself. So in theory you could take the 80k and then 1031 exchange the 15k into another property and defer part of the gain. But with you taking a majority of the proceeds you would be paying tax on a majority of the gain. However dependent upon taxable income you could get away with a pretty low tax bill due to favorable capital gains tax rates.

Be sure to work with a qualified intermediary and a tax professional to ensure you comply with all 1031 exchange regulations and to be sure you keep basis correct as all a 1031 does is defer your gain.

Happy to help run some numbers or do some basic analysis for you if you would like. 

I agree with @Bill Hampton. Always consult with your tax professional first to see if a cost segregation is necessary. Typically a cost seg can provide a ton of benefits to accelerate depreciation on pieces of the purchase that wouldn't usually be allocated out under normal circumstances. 

If you need help finding cost seg partners, feel free to reach out as I have a few good referrals that I have used with my clients in the past. 

Understood on your first point.

But I believe you are wrong and have a misunderstanding of what AI actually is. 

If you did your due diligence on what AI actually is, then you would understand that my initial post is in fact correct or else I would have not posted it. Artificial intelligence (AI) is the simulation of human intelligence processes by machines, especially computer systems. Artificial Intelligence (AI) enables machines to learn from experience. Key word there, experience. It must first learn what you need it to know, and then apply that knowledge. That is where categorizing transactions comes in to play. You first teach the machine the vendor name, and then teach it to associate that vendor name with said GL account. So now you have a robot who can read transaction details and classify that transaction to the programmed GL account. So for example, you set your rules to Lowes classify as Repairs because the only items you buy from Lowes are repair related. You swipe your credit card at Lowes, the machine has learned that Lowes within the transaction line detail is to be associated and coded to repairs. You then never have to categorize a Lowes transaction again (unless circumstances change where you are making other transactions at Lowes).

So yes, AI is capable of learning to read transaction details and categorize that transaction based upon the initial rule you set. A robot is not going to know accounting, unless it is programmed to do so.

From there, you then can generate your reports. So while AI did not literally go and generate your report, it did all of the leg work for you to click a button to obtain whatever report you need. AI can not read your mind to auto generate reports. You would have to set rules up for that as well. It learns from experience. There are tools to integrate with Quickbooks and Excel to generate your reports for you based upon text prompt.

Am I saying the software is perfect? No. But to say that my initial post was incorrect is simply not true. 

No one said AI will take over accounting, but those who fail to adapt to the use of AI in their daily routines will slowly be phased out by the accountants who do.

And to your point on QBO and Xero, it can based on rules you setup for incoming transactions. So it is as effective as the rules you setup for it. If you setup poor rules, then sure, it will poorly categorize them. It is not perfect, which is partially why I mentioned consulting with an accounting professional when it comes time to set these things up. There are too many nuances in accounting to try and do these things without the advice of an accounting professional. You will only end up costing yourself more time, headache, and possibly money.

I recommend working directly with your tax professional to help ensure you have a smooth setup going for QBO and/or Xero. You need someone who understands the tax piece and the accounting piece to make sure everything is in sync. If your tax professional can not provide advice on QBO/Xero setup and categorization, you may need to think about hiring a new tax accountant. Your tax professional should not just do your taxes and send you out the door. They should act as a strategic partner for all of your accounting needs.