All Forum Posts by: Ben Raygor

Appraisal reports can vary with terminology used, so I can't say anything about the context of this one, but Site and Site Improvements most commonly refer to Land and miscellaneous land items like driveway, landscaping, etc.  

@Eamonn McElroy That is a great court case and an addition to my statement would be appropriate.  
"The IRS is not going to look favorably on a high building value on a tax return if the official records (tax assessment and appraisals) are pointing to low building values...so you had better be ready with a response for the IRS if they question/challenge your basis apportionment and you are using a basis ratio that is more favorable for you than the ratios calculated by the tax assessment and appraisal.  Per Meiers v. Commissioner (TC Memo 1982-51), one such example of supportable grounds could be a calculation of the estimated building replacement costs."

I like that the court said "We conclude that petitioner's valuation had a reasonable basis and was much closer to the mark than respondent's".  It implies that the court should be reasonable in considering what "the mark" might be in any given situation.  Unfortunately, the court did not provide any additional information about other reasonable methods to determine "the mark" for real estate.  

I 100% agree that we should care about what is supportable and favorable to the taxpayer.  That's where I always start and if we think the "official" document ratios are unrealistically unfavorable, we have a conversation about what other supportable methods might be available for determining a possibly higher building ratio.  Through all of this, the taxpayer needs to be thinking about how much effort is it worth to fight for a higher building ratio.  The purchase price of the property will obviously make a big difference in influencing the value of exploring other valuation options for the property.  

@Fareed R. Are you saying that the stated dollar amounts are 3.5x off from each other or that the Building/Improvements ratio is 3.5x off from each other?  
For example, if you are talking about dollar amounts, they could be 3.5x off from each other while still being close in terms of building ratio. It could be that the appraisal is using an updated estimated FMV of the property that is much more realistic.
In both scenarios, you want to calculate the building ratio by taking the stated building value and dividing it by the stated total property value to get your building ratio.  I'd be surprised if the building ratio from an appraisal is 3.5x higher than the building ratio from the tax assessment.  If so, you may need to discuss further with a tax preparer to analyze the situation and determine your next best step forward.  

@Fareed R.

I agree with the others who indicate that you should be using the county tax assessment apportionment for building/land and that an official appraisal might help you out by giving more favorable numbers. It seems like most appraisers just use the tax assessment numbers most of the time unfortunately.

The IRS is not going to look favorably on a high building value on a tax return if the official records (tax assessment and appraisals) are pointing to low building values. You need to have proof to justify your position.

@Owen Thornton Having a property management company might provide some amount of legal and administrative benefits. However, you would also be adding legal and admin complexities in different ways.

This is generally not a question I see investors reasonably spending much time considering until they have a larger rental portfolio. Even then, the appeal of adding your own PM company to the mix will depend a lot on your involvement in your rental portfolio.

@Owen Thornton Good question. Lots of things to consider.

I agree that a lot of people are creating LLC's for investments, that if they analyzed their potential risk and considered the liability coverage they might be receiving from

- their individual property insurance coverage

- an umbrella insurance policy

- property management (if they are paying somebody else for this)

they might be a bit more likely to stick with holding their first few properties in their personal name.

I also agree that using an LLC for a property owned by two non-married individuals is a good consideration. If nothing else, just to force an operating agreement to be signed.

@Joe Atkins The reason for the appraisal is so that you have written proof from a professional who is qualified in the subject matter, the appraiser, for the cost basis to be reported for the land sale. You and your tax preparer do not want the IRS giving you a hard time about the cost basis allocations.

If the acres of land are sold right away, that do not have a building on them, your hope is that the appraisal report will identify those land plots as more valuable than the land the house is sitting on.

This could be more valuable than simply assigning equal cost basis amounts to each acre of land. And an appraisal will help justify this approach. If the land mentioned is worth less than the land with the building, you do not want to get in trouble for simply allocating cost basis evenly per acre. An appraisal could save you from this mistake.

Those are the reasons that come to mind as to why a tax person would be requesting an appraisal.

@Mohammad Haidarasl if you have multiple separate loans (with different loan amounts outstanding and interest rates), consider picking some to pay off completely to help free up your Debt-to-Income ratio a bit. This will come in handy if you need to speak to a lender about a rental property in the near future.

Freeing up those fixed monthly minimum debt payments can be a big deal to a lender as well as to yourself for cash-flow and flexibility reasons.

Wholesaling is an active business activity, meaning it is non-passive ordinary income subject to self-employment taxes (generally 15.3%) in addition to simply being reported as taxable income.  

Running an active business activity generally results in legal benefits, low-to-no financing benefits, and greater flexibility from a tax standpoint. You mentioned S-Corp. The hope, from a tax standpoint, would be that your your business is profitable enough to experience significant tax savings by having your LLC elect to be treated as an S-Corporation.

We do not recommend that you form a new S-Corp or elect to have an LLC treated as an S-Corp unless you are certain that the tax savings will be there and have talked through your situation with somebody in the future.

In my opinion, if you wholesale, you are running an official business whether you are using an LLC or not. You need to figure out the following:

• Do I get any legal benefits by running my wholesale business activity through an LLC? Can I legally do this?
• What is the cost to forming and maintaining an LLC?
• Am I ready for the administrative burden of best accounting practices when it comes to using funds in the LLC checking account? Basic Rule - You should almost never pay for personal expenses directly from your LLC account; first make an owner distribution to yourself personally and then pay for the item from your personal account.

There is a chance that an LLC will seem pretty reasonable to you after working through those questions. Hopefully my response helps you analyze the cost and benefits of using an LLC for your wholesale business activity.

What I have seen the most is investors using MileIQ or Excel.  MileIQ can be free if your trips are infrequent enough.  But at some point, you would need to use the paid option.  The thing with the phone apps is that you need to be diligent about properly identifying your trips as business or personal.  A lot of people get started and then forget to either turn the app on or turn it off, and then are overwhelmed with needing to sort through a bunch of personal trips or needing to recreate the actual log manually if they forgot to have the app on.

Remember that a mileage log should show four things:

1) Date

2) Miles Driven

3) Location 

4) Business Purpose of the Trip