All Forum Posts by: Brandon Hall

@Jocelyn Canfield C-Corps result in double taxation. S-Corps do not as they are pass-through businesses.

I believe what @Ben Raygor was saying is that LLCs provide the investor with flexibility to potentially elect S or C should your facts/circumstances require such an election. Landlords should rarely, if ever, have rentals in an S or C Corp. 

We always advise clients that entity structuring for landlords should be primarily focused on asset protection. The tax benefits of moving property into an LLC are nil, even with this new tax plan. So consult an attorney :)

@Jules Semanchuk oh gosh, please please please don't put that rental into an S-Corp. An LLC will be just fine. If you put it into an S-Corp, you'll potentially set yourself up for failure at some later point.

You can materially participate in rental activities without have the rental in an LLC. Additionally, we have the question of whether or not your rental will even show net taxable income. Generally, it's not a huge deal for US citizens living abroad.

If this guy is great at the international tax laws, you may want to keep him around. But I'd be sure to double check everything he says regarding rentals as the S-Corp isn't great advice (with the caveat of course that he knows all of your facts and circumstances and you may have that one highly unique situation where an S-Corp makes perfect sense for rental real estate, but it's extremely rare).

@John Woodrich of course, everything you said is important. That's why I said that was just a high level illustrative example. 

But if you're not looking at 1099 vs W2 starting in 2018, you could be leaving money on the table. 

@Joe Splitrock I don't think so. There are several ways to determine basis. (1) look up the allocation between building and land in the property assessor database; (2) look at the underwriting on your insurance policy; (3) look at the appraisal if you had one; (4) find local land listings and apply the price/sqft to your lot.

You can use any of those methods. 

What you can't do is arbitrarily choose a random number of 15% and say that's the land value. THAT is what will get you in trouble. If there's no evidence to support the calculation, you'll have a hard time defending yourself from any inquiry.

So when I say allocate more basis to land, what I really mean is, among those four primary methods I mentioned above used to determine basis, choose the method that produces the highest land value. 

@Ben Kirchner check out the Nolo book on taxes for landlords. Once you read that, you can likely manage your own tax prep with a small portfolio.

I always tell people that you need to hire a professional who is going to advise you. Tax prep is a compliance based service utilizing your prior facts. To change your facts, you need proactive advice, not once-a-year tax prep.

@Account Closed it appears that both limitations are not applied if you are below the threshold. Paragraph 3 eliminates subparagraph B of paragraph 2 if you meet the taxable income thresholds. See text:

‘‘(3) MODIFICATIONS TO LIMIT BASED ON TAX21 ABLE INCOME.—

‘‘(A) EXCEPTION FROM LIMIT.—In the case of any taxpayer whose taxable income for the taxable year does not exceed the threshold amount, paragraph (2) shall be applied without regard to subparagraph (B).

Paragraph 2 states:

‘‘(2) DETERMINATION OF DEDUCTIBLE AMOUNT FOR EACH TRADE OR BUSINESS.—The amount determined under this paragraph with respect to any qualified trade or business is the lesser of— 

‘‘(A) 20 percent of the taxpayer’s qualified business income with respect to the qualified trade or business, or

‘‘(B) the greater of— 

   ‘‘(i) 50 percent of the W–2 wages with respect to the qualified trade or business, or 

   '‘(ii) the sum of 25 percent of the W–2 wages with respect to the qualified trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property.

@Account Closed nicely done. So land is not included in the unadjusted basis. 

Strategy #2

If you have the option of being paid on a 1099 basis (as a contractor) rather than a W-2 (employee), and if you make less than $157,500 if single or $315,000 if married, then you need to take a really hard look at making the switch to 1099 pay.

Doing so will allow you to qualify for the 20% freebie deduction.

Example: You make $100,000 as a W2 employee. You have no other income, and you're not married. You take the standard devolution of $12,000 so your net taxable income is $88,000.

On the flip side, you make $100,000 as a contractor. You take the standard deduction of $12,000 AND $20,000 (20% of $100,000). Your net taxable income is $68,000. 

The tax savings will be roughly $4,500. 

Obviously this is a very high level example meant for illustrative purposes only. 

@Derrick E. assuming that your net income of $23,600 is your net *taxable* income (meaning after depreciation and amortization), then yes you have it right - you'd be limited to the $2,500 (2.5% of cost basis). 

But, because you fall below the $315k MFJ threshold, you'd get to take the 20% deduction on the net taxable income. 

@Account Closed it doesn't matter how long it lasts. The regulations deem driveways a land improvement with a useful life of 15 years.

Who said houses only last 27.5 years? That's the useful life of rental properties. 

HVAC is 27.5 year property.