All Forum Posts by: Brian Schmelzlen

Hi Darrell,

If you are getting into contracting, you will probably want to hire a good, local bookkeeper early on.  Preferably, you should hire one who is familiar with the construction industry because there are some specialized accounting methods that apply.

As you look for a tax preparer (CPA), you should think about what is important to you?  Some people like to meet with their CPA in person somewhat regularly, in which case you need someone local to you.  If you primarily care about receiving good advice but don't care if you ever meet in person, you should focus on people (nationally) who 1) have systems in place to let you transfer tax documents online securely (not through email), 2) who have a strong understanding of the tax rules that affect your industry, and 3) who have a strong understanding of Oregon tax laws.  Not necessarily in that order, but all 3 are very important.

@Carlos Gonzalez

I am not sure why a rental property is being listed on Schedule C.  It should be on Schedule E (putting it on Schedule C would cause you pay self-employment taxes).

If you put $20,000 into the property as repairs/renovations in 2017, how much of it is deductible in 2017 depends upon the type of work done and the timing in 2017 (the new tax law had some retroactive impact for qualifying work done at the end of the year).

Also, how much of the repairs/renovations are deductible depends upon whether the work is being done on the rental portion of the fourplex or on your personal residence.  The work done on your personal residence is not deductible, but will increase your basis in the property.

Hi @Rebecca Shine,

This is the type of expense that would normally have to be capitalized (and depreciated over a number of years based upon its class life for tax purposes; "useful life" is primarily used with financial accounting).

However, there are 3 safe harbors that may allow you to expense it right away as an operating expense.

1) Routine maintenance.  To qualify as routine maintenance, you must reasonably expect to perform the repair again within the asset's class life.  You probably do not qualify for this, but talk to your CPA about all of the facts and circumstances.

2) De Minimis Safe Harbor.  If the expense was less than $2,500, you can deduct is under this safe harbor if you make the election.  Obviously $4,300 for the entire job is over that amount, but let your CPA examine the invoice (or invoices) to see if you may still qualify.

3) Small Taxpayer Safe Harbor.  This safe harbor requires that you perform a calculation, but basically if the total costs (repairs + improvements) to a building within the year are under a certain amount (not to exceed $10,000) you may be able to deduct everything as a repair during the year.  This is an election you will have to make, and you should have your CPA perform this calculation most years as a matter of practice.

What do you mean you went exempt?

If you mean you set up a not-for-profit entity, those aren't even fully tax-exempt as "unrelated business income" is subject to taxes.

Some of the businesses they are trying to restrict is probably good for you as well in the long-term since there are not a lot of reputable businesses that want to be located next to an adult video store, etc.

I understand their motivation for everything listed on B, although some are a bit restrictive for you.  I would focus on who you want as tenants for your building, and then if your ideal tenants are not on that list anyways it is not a problem for you.  However, if your ideal client might be on that list (e.g. the military recruiting office) then you should not agree to it.

B(t) does not bother me since it says "non-professional use", but I would talk to a local real estate attorney to make sure you fully understand what courts have interpreted that to mean in your area.

If you are just looking at this property in a vacuum, then no there is not a way to avoid taxes on this sale.  However, keep in mind that you will be taxed at capital gains rates which are either 0, 15, or 20% (federal only, not including state) based upon your income.

So my question is are there things you can do outside of this sale to decrease your overall income for the year so that you are taxed, but taxed at a 0% rate for federal income tax purposes?

For example, lets say that another one of your investments is commercial property that needs a lot of money invested into it (repairs, etc.).  You could put your money into that, and then have a cost segregation study done.  Hopefully (talk to your CPA and/or a cost seg specialist first) enough of the rehab work will qualify as 5-15 class-life property.  If that is the case, under the new tax law you can take a 100% bonus depreciation on it which means that it would be entirely deductible this year bringing down your taxable income significantly. 

That is certainly a valid concern, but if they are locked in for 10 years you are still in good shape. You should have made a great cash on cash return by that point, and once the government lease is up you have options.  You can try to get the government to renew the lease (they don't particularly like moving either, especially if the building suits their needs), find a new tenant, or sell the building.

Hi @Clayton Crawford,

I would start looking for a CPA soon.  It may be more difficult to find a good CPA willing to take on more clients later in tax season when everything is very busy.

I would always start out by asking the CPA if he/she works with other investors, and what type of investing they do.  If the CPA says yes, but it only people who happen to own 1 rental property and aren't actively pursuing real estate investing the CPA might not have the level of experience you are looking for.

I would also ask how the CPA would recommend that you structure your business, or whether you should be using an entity at all. A good REI CPA will recommend different structures based upon what type of investing you are doing and what your goals are.

I would also try to make sure that the CPA is competent in real estate by asking a few basic questions about Sections 121 and 1031.  Know the answer to your questions first, and see if the CPA is giving you the correct information.  For example, if you do fix and flips, ask how you would do a 1031 exchange on it.  The answer is that you cannot (unless you end up holding the property for a while as a rental) because if you are a flipper then houses are considered inventory, and inventory cannot be used for 1031 exchanges.  You can also ask if you live in a flip whether you can take advantage of the Section 121 capital gain exclusion.  What you would be looking for here is what follow-up questions the CPA asks you (i.e. would it be your principal residence, how long would you be living in it, etc.).

I think Russell is correct that the overall population of a city will not change much, and most of the cities mentioned already have strong economies.  However, I do think it will have an impact on the home prices in the suburbs of the HQ2 city.  They will be moving more high income jobs into the area, and create (at least in the short-term) changes to the migration pattern for that area as it would be more desirable.  It could be a decent appreciation play if you guess right, but if you buy after its announced you might be buying into a mini-bubble.

Hi @Craig Cahail,

If you are a long-term buy and hold investor, you probably do not want your properties in a corporation. At most (depending upon your situation), I would recommend having it in an LLC.

However, if you are more interested in fix and flips or new development, I would recommend setting up an S-corporation, or possibly an LLC and an S-corporation depending on how long you plan on holding the land before starting to do any work.

I am not in the Seattle area, but I would be happy to talk to you about tax strategies if you want to PM me.