All Forum Posts by: Ben Raygor

Does 30% seem about right?  I'd say that is a good estimate percentage to use.  If Federal taxable income is $65k, that puts you in the 12% marginal tax bracket.  So for Federal purposes, I'd be planning on 27.3% (12%+15.3%).  For South Carolina, it looks like you would be in the 7% marginal tax bracket.  So 30% might be conservative for Federal income tax purposes, although in total, it might be less than your combined tax once you add in the state tax.  

And don't forget to budget for the tax hit when you have positive net income from your flip (after all expenses including mileage). Self-employment income from flipping will be taxed at the ordinary Federal rate plus the state rate plus the 15.3% FICA rate generally. 

You do not want to be surprised by and unable to pay taxes simply because you are always rolling the profits into the next flip deal. 

Lee hit the nail on the head that opportunity zone investing is the consideration for selling appreciated stock and deferring capital gain recognition for someday in the future. However, this limited partnership might not be a QOF. If that is the case, then deferring capital gains from the sale of stock isn't an option for you on this investment. 

When analyzing options here, you need to consider what your capital gains tax rate will be (Federal plus state...maybe even the Net Investment Income tax), what the anticipated future growth is for the stock compared to future growth for your tax-free Roth IRA, and what your private financing options might be.

I agree that the 1031 exchange is difficult to implement here, so I do not have a different answer there. 1031 exchanges are only for business assets (stock doesn't fall into this tax bucket) and the ownership rules can be tricky. 

It looks like your decision needs to be based off of an analysis of your current and estimated future tax rates as well as estimated growth in your various investments. 

I agree with @Michael Plaks on this one.  The government cares about what the loan funds were used FOR, not necessarily which piece of real estate secures the loan and shows up in Box 8 of the Form 1098-MIS "Address of property securing mortgage". 
A lot of people think that simply replenishing their personal checking account with a refinance has the same tax implications as if they purchased the rental property with a loan to begin with.  This is generally not the case (although there might be an allowance depending on the number of days between purchase and refinance - Notice 89-35, 1989-1 CB 675).  

While I am a fan of 1031 exchanges in general and find them to be very strategically useful at times, I agree that the stress component isn't always going to be worth it.  It depends on your ability to find replacement deals and the amount of gain/recapture being deferred.  
Many investors, high W-2 earners who are in the suspended passive loss territory for their portfolio for example, will have suspended losses freed up to be deducted in the year that they report a capital gain from the sale of a rental property.  In these cases, it can be nice to finally start deducting some of those net rental losses that have been stacking up for years.  
So just because you have a large capital gain, it doesn't always mean that a 1031 exchange is needed to not pay new tax dollars to the government for the year of sale.  

I love the example! Thank you for that!
I agree with the pros/cons provided above. I generally summarize the benefits of a SMLLC for holding a rental property like this:
- Tax - Generally None
- Legal - Definitely
- Financing - Generally More Expensive

Next Steps:
- Consider the administrative burden of an LLC (formation, annual renewal fee, and running a rental operation through a separate checking account that is not your personal account).
- Discuss your options with an insurance agent.  You might find that beefing up the main insurance on the property itself and/or adding an umbrella policy that covers multiple assets is quite affordable.  

@Yolanda Williams From the sound of it, your description is making the sale of this property seem like it should be classified as the sale of a business asset instead of "flipping".  If you had the intent to flip, which it sounds like you didn't, your flip would be subject to self-employment tax.  But since you rented the property, and for over a year maybe (you said you held it for >1 year, but I don't know how long you rented it for), it looks like you'll qualify for capital gain treatment for the sale of an asset.  

On your tax return, you'd have assets listed out at $25k for building and $25k for improvements.  You'd report gross sales price and any closing costs.  All other costs of operating the rental property along the way are expenses reported against your rental income during the year.  

In your case, what will probably matter the most in defending capital gain treatment is just that you can justify your "intent to rent" the property when you purchased it.  

I recently heard about an investor who held a property for a few weeks over a year, had it rented out for only 2 months during that period, sold it and reported a capital gain on the sale.  The IRS challenged his capital gain treatment and disqualified it, causing it to be reported as a "flip" instead and subject to self-employment status, and they said he didn't appear to have the intent to flip.  He decided not to take the matter further and just took the tax hit and the following penalty.  Anyways, justifying your intent for the property is important.  

Chris, if you convert your $1.5M primary residence to a rental property used 100% for business in 2020, all of the mortgage interest, property taxes, and insurance will be 100% deductible against the rental income that property generates. If the conversion happens part way through the year, those expenses will need to be prorated. Having a loan on the property doesn't change the deductibility of any of those expenses - it just means you have to pay down debt and pay interest along the way for that property. 

Todd, "non-residential" generally means that the property is not used to furnish lodging or in connection with the furnishing of lodging.  Commercial buildings that are providing office, warehouse, or storefront space, etc. would not be considered "lodging" in this case, so all personal property purchased and used in those commercial properties could potentially qualify for the Section 179 deduction.  "Non-residential" means that nobody is living in the property, whether it's your primary residence or a rental property that is the dwelling place of the tenant.  

https://www.irs.gov/pub/irs-pdf/p946.pdf   - Page 18

@Natalie Hideg Let's make sure you understand "itemized deductions" clearly first vs your expenses for a rental property. You don't "itemize deductions" for a rental property in the way the phrase is used for your personal tax return. If you have a rental property, you always report the rental income, insurance, repairs, maintenance, property taxes, mortgage interest, etc. that is directly related to that rental property. This will all show up on Schedule E for each rental property you own, whether you use an LLC or not (unless those properties are owned by a partnership, S-Corp, or C-Corp).

When taxpayers "itemize deductions" on their personal return, we are referring to the Schedule A in which they are able to report the mortgage interest from their primary home (which is not being rented out...unless you're house hacking, in which case the personal use portion of the mortgage interest and property taxes are reported on Schedule A), and the property taxes from their primary home.  This is the real estate part of Schedule A.  

There is another line on Schedule A for State and Local Income Taxes paid.  For many higher income earners, this line has been a large portion of the total amount that ends up exceeding the standard deduction for the taxpayer, thus allowing them to claim "itemized deductions" on their tax return instead of the standard deduction.  

The proposed tax change is to only allow an aggregate $10,000 amount from the combined categories of 1) state and local income taxes, 2) property and personal taxes, and 3) personal mortgage interest paid.  This, along with the increased standard deduction will result in MANY more taxpayers claiming the standard deduction on their tax return in the future, even though they itemized deductions in the past.  This change will have no effect on your rental property investments.