All Forum Posts by: Brandon Hall

@Luke Carl AirBnB will typically be considered Sch C income.

If your average rental period is less than 7 days = Sch C.

If a average rental period is >7 and <30 days AND you did not provide substantial services, Sch E.

If >30 day avg rental period, Sch E.

@Sarah Korsah I wrote an article on BP that covers this very topic: https://www.biggerpockets.com/renewsblog/stop-cont...

Hope it helps!!

@Jenny Sun I'm surprised they don't have an exit clause or at least let you know what happens if someone wants out. What does your contract say about termination?

Ah okay. Since these properties were seemingly held for investment purposes, I wouldn't classify you as a dealer either. Likely, there was/is little reason to file a Schedule C which is why you're running into all of this.

You need to google "tax resolution expert in xx area" and ask them if there's anything you can do at this point. I don't know how far along you guys are so it may be tax attorney time.

@Erica Nagle unfortunately no one here will be able to provide the advice you are looking for with any accuracy. There are a lot of facts and circumstances that need to be examined and understood.

I think you'll agree that this is a good example of why using a CPA, upfront, is extremely important. The CPA will help document the tax position, and thus be able to defend against an audit.

Question: when you said you've "bought and sold" 10+ properties, what does that mean? Were you flipping? What was the average hold period for the properties? This is likely what the auditor is looking at to make the determination. Your CPA needs to look at the same facts and make the case that you indeed have a Sch C business.

In fact, if you indeed have a Sch C business, I would be akin to arguing that your educational expenses ARE deductible. They helped you expand upon your current skill set rather than qualify you for a new trade or business. Tell your CPA to check out T.C. Summary Opinion 2016-35: https://www.ustaxcourt.gov/UstcDockInq/DocumentVie...

Your current CPA may be doing everything necessary to defend you, but since the IRS revised UPWARDS it makes me wonder what experience (specifically real estate) the CPA has.

@Ray Li interest on home acquisition debt on a qualifying residence (primary or secondary home) is deductible on the first $1MM of debt. Interest on home equity debt on a qualifying residence is deductible on the first $100k of debt.

Notice that these limits are related only to qualifying residences (primary and secondary). This doesn't relate to your specific questions, but definitely an important point to make. 

Interest on acquisition debt where the underlying asset is a rental property is fully deductible and traced to the underlying asset. 

Interest on home equity debt is traced to where it is applied. So you can take a HELOC on your primary residence, apply the funds to the rental, and deduct the interest on Sch E (same can be said for Sch C if you applied those funds to a business instead).

Refinanced debt is where it gets tricky. There are many tracing rules to follow, and there are specific timing rules that can make your life a lot easier if met.

The general rule is that, on refinanced debt, you must determine (trace) how that debt was applied. If you do a cash out refinance and you keep the money in your checking account, maybe reward your hard work with a new car or a vacation, you're out of luck. The interest is non-deductible. 

If instead you apply that debt to a new rental, business venture, or another investment opportunity, the interest will be deductible.

Tread carefully and get to know those timing rules. 

@Michael Bertsch no carryover is allowed during the year in which you use the simplified method but if you have a prior carryover from using the regular method, you can continue to carry that forward.

@Austin Underwood at your building value level, a cost Seg study will provide only a marginal benefit over what you could be doing for free:

Since you are building these homes, I'd assume you have all the cost data of every component, no? If so, congrats, you've done all the hard work. Now it's just a matter of reporting each asset/component separately on your tax return.

By going this route, you will miss out on classifying a portion of your electrical and plumbing as personal property which would definitely benannopportunity cost to consider. But I don't think it's a big deal at your value levels.

Just make sure you get really itemized invoices and you'll be golden.

@Michael Bertsch you are correct - the home office deduction will be disallowed and carried forward as it cannot cause a taxable loss. But you should continue to claim it regardless.

@Toby Russell there is no tax benefit to utilizing an LLC except for the fact that it provides us with flexibility to later elect the S-Corp tax status. However landlords should generally not be utilizing S-Corps, so to answer your question, no you don't need an LLC.

However, it is recommended to use an LLC for liability purposes. Speak with an attorney, not an accountant, about this.