All Forum Posts by: Brian Schmelzlen

@Anthony Fecarotta If the property is your principal residence (and could potentially remain your principal residence), using Section 121 is better for you than a 1031 exchange.  You must have own and resided in the property as your principal residence for 2 out of the past 5 years, but if you meet that requirement you can exclude $250k of gain from your federal income taxes ($500k if married and filing a joint tax return).  Most states conform with this as well.

A 1031 is a tax deferral strategy that is great for investment properties, but there are strict requirements that must be met.  If you can instead use Section 121 (which is a tax elimination strategy, not simply a deferral), that is better.

SMLLC is an abbreviation for single member LLC.

Yes, I am sure.  This is one of the key differences between LLCs and S-corporations, and one of several reasons why most flippers set up their businesses as S-corporations rather than LLCs.

With an S-corporation you are required to take a reasonable salary (if you are taking any money out of the corporation) and you will pay payroll taxes on the reasonable salary.  However, there is no self-employment taxes or payroll taxes on any distributions.

With an LLC, you are prohibited from taking a salary (although you could have a guaranteed payment) and your entire share of the business' profit is subject to self-employment taxes regardless of whether you take it as a distribution or leave it in the business (except income from rentals; that is not subject to self-employment taxes).

@Mohamed Nagoor

First, as an owner of an LLC you are not allowed to take a salary at all (unless of course you elect to be taxed as a corporation).

However, that does not impact whether or not you should be making estimated tax payments.  You are going to have to pay taxes on the $30,000 of profit whether you leave it in the business or not.

Therefore, you will want to make sure that you pay enough in taxes (either through W-2 withholdings if you also have a W-2 job or quarterly estimated tax payments) to qualify for a safe harbor from underpayment penalties.  Talk to your tax preparer to see how much you will need to pay in taxes to qualify for the safe harbor.

@Jennifer Van vlymen

There is something known as the interest tracing rule that, in essence, says that how the interest will be treated depends upon how the loan proceeds are used rather than what is securely the loan.  Therefore, since the loan proceeds would be used to purchase an investment property the interest would be deductible on Schedule E where you report all of the other rental activity.  @Michael Plaks is correct that you will want to keep very good records.

@Craig Jeppesen, unfortunately you are thinking of the old tax rules.  That was true for 2017 and before, but is no longer the case.

Hi @Samuel Lynch,

I see that you list yourself as from Oceanside.  If you still are a California resident, you may want to consider using a tax preparer who is familiar with California and its excentricities (and obviously someone who is strong with real estate and its unique tax issues) rather than someone located where your investments are.

Hi @Rickey Wiley,

To amend your tax returns (for any year not closed by statute) and potentially file Form 3115 for a change in accounting method, a professional tax preparer will need:

1) A copy of the original tax return as originally filed;

2) Financial statements (included is included in most property manager's reports) for each property;

3) Form 1098 showing the amount of mortgage interest paid (and real estate taxes potentially);

4) A property tax statement showing how the local government allocated the value between land and building; and

5) The settlement statements from the purchase of each property (if the cost basis needs to be corrected).

This ^

However, most of the calculations will be done in the first year so they shouldn't have to worry too much about keeping track of all this.  As an installment sale, they will calculate the the gross profit percentage in the initial year and just apply that percentage to the principal payments received each year.  They will need an amortization schedule to help them determine each year what portion of your payments are principal and what is interest.

From my experience, the IRS generally isn't looking for time cards or anything else like that.  They are looking 1) for proof that you work as a real estate investor, and 2) that you don't have another job or business that would logically take more of your time.  Of course, having a contemporaneous log of your hours would be exceedingly helpful.

My firm has, correctly, proven to an IRS agent during an audit that our client was a real estate professional just by talking to the agent about what she does.

Mike,

Having seen a lot of @Ashish Acharya's posts I am confident that he would do a great job for you.

Hi @Kiersten Vogt,

Unless meeting face to face with your CPA is very important to you, you could consider going with one of the CPAs on BiggerPockets.  Most of us have clients nationwide and are experts at real-estate related tax law at the federal level.  Most tax-related decisions you will make based on federal tax law, with PA discrepancies as a secondary consideration.

However, if you are looking for a good local CPA your husband is in a great position to find one.  I am guessing that as a contractor he has a number of investor clients.  He should talk to them to find out who they use.