All Forum Posts by: Brandon Hall

@Michael Plaks amen! Appreciate you and everyone else for jumping into the conversation. 

@Ashish Acharya no I think we're on the same page. My point in citing those cases was that we shouldn't automatically assume an LLC member is subject to Sec 469(h)(2).

Still, taxpayer is a REP and materially participates in their own rentals. Based on the facts posed, I presumed the only activity was managing the rentals in which they said they exceed 750 hrs. They make the election to aggregate all rental activities. How are the LP losses treated?

@Ashish Acharya @Michael Plaks

Ashish correctly points out that LPs are subject to more specific rules, however the courts have found that a limited liability company (LLC) interest is not treated as a limited partnership interest. A taxpayer may establish material participation in an LLC interest via any of the seven tests. See Garnett,132 T.C. 368 (2009), and Thompson,87 Fed. Cl. 728 (Fed. Cl. 2009).

Taxpayer is a REP, materially participated in their own rentals, and can make the grouping election to treat all interest in rental real estate activities as one. There shouldn’t be concern about being an “LP” and there’s no issue with not materially participating in the entity as the grouping election would be made.

Am I missing something?

@Chad S. yes, long term cap gain rates are dependent on taxable income. Taxable income = all income less all deductions.

Are you running, or investing in, a tax shelter? A tax shelter occurs when an entity shares more than 35% of its losses with LPs. Tax shelters are subject to the business interest limitations.

Real property trades or businesses can elect out of the limitations by attaching an election statement under IRC Sec 163(j)(7)(B) to the return. This will allow you to avoid the limits on business interest but you have to use ADS depreciation on your residential real property assets (30 years straight line versus 27.5 years). 

Disclosure: CEO of The Real Estate CPA here. 

I think you should explore local and non-local CPAs before making a decision. A virtual firm will use a lot of tech to facilitate the relationship. Some folks love that, some don't. 

Do you have a local REI group you can touch base with? Typically they will have referrals to local accountants you can interview.

The CPAs and EAs I see on BP are exceptional so make sure you reach out to and chat with a few of them too before making a decision. 

One thing I often see lacking from the search criteria is client experience. Think about questions you can ask to gauge the experience the professional will give you when delivering services. Someone can be a brilliant tax person but horrible to work with, and also vice versa. 

While we've certainly goofed with some of our clients in the past, we try to prioritize providing clients with a great experience. You'd be surprised at how the simple things, like answering an email within 24-48 hours versus two weeks (or never!) can totally enhance a working relationship. 

If your MAGI is above $150k, you cannot take passive losses in excess of your passive income. If you or your spouse qualify as a real estate professional, and if you materially participate in your rental activity, your passive losses will be considered non-passive and you'll be able to claim the loss without limits against your other income. 

On flips, generally, costs are capitalized to an Inventory account and backed out as COGS when you sell the property.

On rentals, costs are either expensed or capitalized depending on the applicability of the Tangible Property Regs and your placed in service date. Generally speaking, your rehab costs will be capitalized. 

Though you could look at segregating the costs into 5, 7, and 15 year property and take 100% bonus depreciation on that property. 

Agree with @Jay Hinrichs. Negotiation skills shouldn’t matter. We filled our capacity by mid-December for 3/15 and 4/15 and I image the other awesome tax pros that contribute to BP are in the same boat.

A CPA who can take you on at this point: (1) is new and doesn’t have enough clients to be at capacity at this time of year; (2) doesn’t have a good operational model in place; (3) just hired fresh talent that has expanded capacity; or (4) is willing to give other clients a bad experience if you pay them enough.

On points #1 and #2, I know because I’ve been there with building my own firm. It leads to awful tax seasons and lots of angry clients. Only once did we figure out #2 did we realize that we really need to plan and fill capacity in Novemeber and December each year. And then our client experience shot through the roof!

#3 is possible. But generally it takes a while for a new employee to get integrated into the firm operations

#4... yikes.

Here’s what I’d suggest:

1. File for an extension. 

2. Pay any amount owed to the IRS by 4/15 to avoid penalties. That means you’ll have to estimate your outstanding tax liability (if any).

3. Interview CPAs after April 15 if you’re serious about building a long term relationship with the right team.

Hope this was helpful!

Interest is an operating expense for landlords. Principal is not an operating expense, instead, it reduces Loans Payable. Escrow is also not an operating expense, instead, you should book it to an asset account such as Lender Escrow. 

You would either need to do a Journal Entry or split the transaction depending on the software you are using.