All Forum Posts by: Brandon Hall

Thanks @Russell Brazil ! That's quite the compliment. 

@Justin F. a lot of people are confused about the 20% pass-through deduction but you do not need an entity to qualify for it. You just need qualified business income (QBI).

@John Brees what your CPA means to say is that your income has phased you out of being able to claim passive losses generated by your real estate activities. You will still take 100% of the depreciation deduction allowable on your rentals, but if that deduction causes you to have a passive loss, that loss will become suspended and not currently utilized due to your income level.

@Jeffrey Levy the $100k/$150k is called the Passive Activity Loss limitations. If your MAGI is below $100k, you are allowed to take up to a $25k passive loss. If you’re MAGI is over $100k, you are phased out of the $25k loss allowance. When your MAGI exceeds $150k, you can no longer take any passive loss.

To get around the PAL rules, you can qualify as a real estate professional and materially participate in your rentals. At that point you can take passive losses in an unlimited amount regardless of your income.

It’s critically important to use the correct terminology when discussing this information. If any CPA tells you that you cannot take depreciation, seriously consider finding someone else to work with. You’re investing a lot of money and you need to ensure it’s well taken care of.

Depreciation is never limited or eliminated. Your passive loss, however, can be.

For example:

Let’s say my MAGI is $160k, I have gross rental income of $10k, expenses related to my rental of $6k and depreciation of $5k.

My net operating income is $4k ($10k - $6k). But my net TAXABLE income is -$1k ($4k operating income - $5k depreciation).

Because my net taxable income from my rental is negative, I have a passive loss. Because my MAGI is above $150k, I cannot take my passive loss and it instead becomes suspended and carried forward.

And thanks @Brian Adams!

@Mike Dymski we can write some fun bookkeeping posts :)

 Thanks for the tag! I won’t be able to make it but keep me in mind for the next one.

@Liz Ridgway your understanding is correct in that you must sell a material portion (or all) of the real estate activity in order to claim passive losses. However, this generally only applies when you make a grouping election and claim the real estate professional status on your tax returns. 

For example, if I sell Property A, and Property A has not been grouped with Property B, C, and D, then I have sold 100% of property A. Therefore I can take 100% of the suspended passive losses attributed to Property A in the year of sale. 

If, however, I have grouped (via a grouping election on your tax returns) Property A with Property B, C, and D, when I sell Property A I have not sold a material portion of the entire group. Therefore I cannot take my passive losses in the year of sale. 

If you haven't made the grouping election, any passive losses from the condo that were suspended will be able to be used. 

Though I'd look into the Sec. 121 exclusion if I were you as it sounds like you may be able to qualify.

@Thomas Castelli is an expert at Opportunity Funds. We'll see if he wants to chime in. 

What questions do you have?

You have three years and 75 days to make a retroactive S-Corp election under Rev Proc 2013-30. 

This means that, as long as your flip is owned by the LLC you can sell it this year and retroactively tax your LLC as an S-Corp.

The tricky part is running late payroll. Penalties can stack up pretty quickly, so if you do decide to go the S-Corp route, I would recommend moving forward with the election sooner rather than later and completing your 2018 payroll asap.

That said, if you have flexibility to push closing, you should explore that. Then in 2019 you'll have more profits to shelter (assuming you do another flip) which will make the S-Corp that much more valuable. There are cons of course, namely pushing income into one year could increase your mariginal tax and also reduce your ability to obtain financing since your 2018 tax return won't show this profit.

I'd say you should speak with a CPA but it's too late in the year to have a good one assist with this, legitimately, under your time crunch.

Opportunity funds! You have 180 days from the sale of the old property to reinvest your gain proceeds in an opportunity fund. You do not have to reinvest your basis proceeds. 

In my experience, you should be fine. You generally have one “account” with the state and they just need to re-tag the funds as 2017.

If they stick to their guns, you could take the position that they owe YOU interest on the funds you paid in. But I doubt it will come to that.