This is almost peak Tax Season. Many BP’s are reaching out to tax professionals here. Frankly, most are seeking free tax advice. Much like a forum on Divorce. The intensity and same desire to avoid paying a licensed professional for his opinion. That’s Fine. Human nature is immutable.
So, here is a useful tool which BP’s can use to answer those questions: AI. Either GPT or Claude. Take you pick.
Most questions revolve around Material Participation, and tax filing compliance. By “compliance” I mean what forms, what States/ Cities?
All AI queries should be in the following format. In brackets I will explain why. Ready?
Let’s start with Compliance
Prompt:
[1] You are an expert in the federal and state taxation of landlords owning rental property [you need to tell the AI what is expected].
[2] I am a CPA, with expertise in taxation of real estate [unless you want a watered-down response, tell the AI that you want a granular response]
[3] Use IRAC format [This is used by attorneys. It means that the response will follow the format of Issue, Rule, Analysis and Conclusion]
[4] Use markdown tables [the output will be in tabular form. You will shout for joy!]
[5] Cite Code, Regs and USTC decisions. [this will give you the absolute legal basis for the answers]
[6] Verify. Do not fabricate. [AI programs, actually called Large Language Modules, can give you false responses. These LLM’s are like puppies that want to please you. They will make stuff up. Be careful!!!]
[7] Facts: I am a resident of Pennsylvania. I am a landlord with 1 rental property in Philadelphia, 1 in Washington DC, 1 in Florida, 1 in Ohio and 2 in California
[Discuss how the properties are titled. In an LLC, individually, layers of LLC's - a WY LLC owning a PA LLC etc. And discuss whether those LLC's have more than one Member. Be specific. The LLC, amazingly, will remember who owns what. ]
What are my Federal, State and Local filing requirements? Income tax and local taxes. What are the annual filing and permitting requirements? Resident and Non-Resident, and LLC. What are the penalties for failure to file?
Comment: there you go! At the end the response, the LLM will pose very useful and intelligent follow-up questions. Be sure to request that all those be answered. They will help clarify the issues. Now when you approach your tax professional you will know the scope of work that is required. Be sure to print out the responses and annotate them as you see fit.
And now for the What-if Questions?
[After repeating exactly items #1 through 6 above, give the facts. Here is an example
Facts: I am a W2 employee at a Company which does [describe. This is important] and my Wife is [employee, contractor, Home Maker, . . ] We are landlords and own properties [see example from above]. My Wife and I manage the properties, we share in this approx [hours weekly]. Our adjusted gross income is [above or below] $150,000. The properties on an overall basis have tax losses.
Under what conditions can these passive losses be considered to be non-passive? Based upon this fact pattern, do we qualify for Real Estate Professional status? IRC §469(c)(7). How should we keep records to document that status? Please provide Checklists.
Comments: select all the follow up questions.
There!!! Now, there is no longer a need to seek free advice from busy tax professionals. Buy your copy of TurboTax with the modules for the States, and you are set to do this yourselves, without having to pay us. Just keep asking the LLM for help. Those pesky State Non-Resident tax returns? A piece of cake with TurboTax. California LLC returns? CA-568. Five minutes. DC Non-Resident? Just one click.
It will even calculate if you feed it numbers. For example, tell it that you have a rental loss $X from a property, and that the Unallowed losses are $Y, and the Qualified Business Income Loss carryforward is $Z. You could theoretically do all the calculations on TurboTax and double check with the LLM. Try it. It won't take too much time.
Be sure to save this post, and print it out.
Uhhhh, one last thought! Remember Mickey Mouse in the Sorcerer's Apprentice?
Navigating FIRPTA: Unlocking the Residential Exemption for Buyers and Sellers 🏡💼
When it comes to buying U.S. real estate from foreign sellers, the Foreign Investment in Real Property Tax Act (FIRPTA) can feel like a complicated hurdle. FIRPTA requires buyers to withhold 15% of the gross sale price when a foreign seller disposes of a U.S. real property interest. This can create challenges for both buyers and sellers, especially when funds are tied up unnecessarily.
But did you know there’s a way to avoid FIRPTA withholding in certain cases? Enter the Residential Exemption. 🙌
What Is the Residential Exemption?
The Residential Exemption allows buyers to bypass FIRPTA withholding if specific conditions are met. Here’s how it works:
1️⃣ Sale Price: The purchase price must be $300,000 or less.
2️⃣ Buyer’s Intent: The buyer (or a family member) must have a bona fide intent to use the property as a primary residence.
3️⃣ Occupancy Requirement: The buyer must occupy the property for at least 50% of the days it is used during the first two years after the sale.
If these conditions are satisfied, the 15% FIRPTA withholding is waived. This can be a game-changer for foreign sellers and an attractive incentive for buyers.
Why Does This Matter?
🔑 For Buyers:
* You get to keep more cash at closing instead of withholding a large portion of the purchase price for FIRPTA compliance.
* The Residential Exemption can make financing easier and reduce administrative burdens.
🔑 For Sellers:
* Foreign sellers no longer have to deal with the complexities of recovering over-withheld amounts by filing U.S. tax returns.
* It’s an attractive selling point for properties under $300,000, especially to buyers intending to live in the home.
Key Considerations for Buyers
While the Residential Exemption is a powerful tool, it’s not automatic. Buyers must:
✅ Certify their intent to use the property as a primary residence.
✅ Document their compliance, including proof of residency (e.g., utility bills, driver’s license).
✅ Understand their liability: If the exemption conditions aren’t met, the buyer may be held responsible for the FIRPTA withholding, plus penalties and interest.
When Does This Exemption NOT Apply?
❌ If the sale price exceeds $300,000, the exemption doesn’t apply—even if the buyer intends to use the property as a residence.
❌ For commercial properties or properties purchased solely for investment purposes.
Why This Matters for Real Estate Professionals
For real estate agents, syndicators, and tax advisors, understanding FIRPTA and the Residential Exemption can help you: 💡 Educate your clients about their options. 💡 Streamline transactions for foreign sellers. 💡 Provide strategic advice to buyers looking for affordable residential options.
By positioning yourself as a resource on FIRPTA compliance, you can build trust and differentiate yourself in the competitive real estate market.
Takeaway
The FIRPTA Residential Exemption is a win-win for buyers and foreign sellers in the U.S. real estate market. 🏘️ Whether you’re buying, selling, or advising, proper planning and documentation are critical to leveraging this powerful tool.
Reality Check!!!
$300,000 is incredibly low, especially in high-cost areas like the New York Metro region, where property values far exceed this threshold. For properties above the FIRPTA Residential Exemption limit, you’ll need to explore other strategies to minimize withholding while staying compliant.
There will be follow up posts on best practices for handling properties that don’t qualify for the $300,000 exemption.
#RealEstate #FIRPTA #TaxPlanning #RealEstateInvesting #ForeignInvestors #ResidentialExemption #TaxStrategy #RealEstateTips #GlobalRealEstate #HomeBuying #RealEstateLaw #RealEstateProfessionals #InvestInRealEstate #TaxCompliance #FinancialFreedom
Many real estate investors don't realize they may qualify for a valuable home office deduction when managing their rental properties. Let's bust a common myth and explore how this often-overlooked tax benefit works! 💡
The Myth: ❌
"Since rental income is passive, I can't take a home office deduction for managing my properties."
The Reality: ✅
This is false! While rental income is indeed considered passive under IRC §469, that doesn't prevent you from claiming a home office deduction if you meet the requirements.
What You Need to Qualify: 📋
A dedicated space used exclusively for managing your rentals
Regular and substantial management activities
This must be your principal place for conducting these activities
The Legal Foundation: ⚖️
The Tax Court in Curphey v. Commissioner, 73 T.C. 766 (1980), specifically confirmed that rental management activities can qualify for the home office deduction, regardless of passive income classification.
Key Considerations: 🔑
The space must be used ONLY for rental management
No personal activities or other business uses allowed
Must maintain solid documentation
Activities should be regular and substantial
Pro Tips: 💪
Consider the simplified method ($5/sq ft, max 300 sq ft)
[Rev. Proc. 2013-13, 2013-6 I.R.B. 478 (February 4, 2013)
Report on Schedule E, not Form 8829
Allocate expenses if managing multiple properties
Caution: those Home Office Deductions cannot be used to increase your losses!.
The home office deduction cannot increase your passive losses:
Example: 🔢
Rental Income: $24,000
Regular Rental Expenses: -$20,000
Net Before Home Office: $4,000
Home Office Expenses: $3,000 [using allocations, not the Simplified Method]
Result: Can deduct full home office
Counter Example: 🔢
Rental Income: $24,000
Regular Rental Expenses: -$26,000
Net Before Home Office: -$2,000 (Loss)
Home Office Expenses: $3,000
Result: No home office deduction this year (carries forward)
Reality Check: 🤔
Let's be honest - while technically you need to:
Most small landlords will simply:
Pro Tips: 💪
The Bottom Line: 💰
If you're making money on your rentals and genuinely use a home office, this is a nice extra deduction. If you're already showing losses, focus your energy elsewhere!
Remember: Sometimes "good enough" beats technically perfect! 🎯
If the numbers are large enough, it might make sense to amend prior year returns. Consult your CPA on the above discussion and how it might apply to you.
§1245 §1250 got to make this sizzle somehow, right? Otherwise, it will bore you to tears . . .:)
The §1245 Silver Lining: Turning Tax "Pain" into Strategic Gain
“’That'll be $500,000 in ordinary income.' Those words from your CPA could ruin your day - or become your secret weapon. Here's how a seeming tax disaster turned into a strategic triumph.
Picture this: You're sitting with your CPA, reviewing the sale of your residential rental property. The numbers look solid - you sold for $2.8 million what you bought for $2 million ten years ago. But then comes the bombshell...
"You're looking at $500,000 in ordinary income from those §1245 assets."
Your heart sinks. That cost segregation study that saved you so much in taxes over the years? It's coming back to bite you. Or is it?
Let's break it down with precision:
The "Pain" (At First Glance):
Your $2.8M sale splits out as:
Building (§1250): $2.3M
Personal Property (§1245): $500K
Original Basis Allocation:
Building: $1.6M (depreciated over 27.5 years)
Personal Property: $400K (fully depreciated)
Building Depreciation:
Annual: $1.6M ÷ 27.5 = $58,182
Total over 10 years: $581,820
Gain Breakdown:
Building (§1250):
Sale Price: $2,300,000
Original Basis: $1,600,000
Less Depreciation: ($581,820)
Adjusted Basis: $1,018,180
Total Gain: $1,281,820
Unrecaptured §1250: $581,820 (25% max rate)
Capital Gain: $700,000 (20% max rate)
Personal Property (§1245):
Sale Price: $500,000
Adjusted Basis: $0
Ordinary Income: $500,000
The Strategic Play:
Remember those suspended passive losses you couldn't use? The business venture that went sideways? That expiring NOL keeping you up at night?
Assume that you're sitting on:
$200,000 in suspended passive losses
$150,000 in business losses
$100,000 in expiring NOLs
The Magic Transformation:
That $500,000 of "painful" ordinary income becomes your strategic advantage:
Absorbs all $450,000 of those otherwise-stranded losses
Leaves you with just $50,000 net ordinary income
Meanwhile, your §1250 gain still gets preferential rates:
$581,820 at 25% max (unrecaptured §1250)
$700,000 at 20% max (capital gain)
The Plot Twist:
What looked like a tax nightmare actually solved multiple problems. Those suspended losses? Gone. That expiring NOL? Saved. That "terrible" ordinary income? It became your strategic advantage.
The Moral of the Story:
Sometimes in tax planning, what looks like a lemon can make premium lemonade. That cost segregation study wasn't just about accelerated depreciation - it was setting you up for strategic wins years down the road.
Next time your CPA mentions §1245 ordinary income, don't sweat it. Smile and ask, "So, what losses can we offset?"
[If there are errors in this analysis, please let me know, so I can adjust. Or simply delete in shame. :) ]
#RealEstateInvesting #WealthStrategy #TaxPlanning #PassiveIncome #CommercialRealEstate #CostSegregation #InvestorMindset #TaxStrategy #RealEstateWealth #InvestorEducation #1031Exchange #AssetOptimization #WealthManagement #InvestmentProperty #TaxEfficiency #RealEstateSuccess #SmartInvesting #PortfolioStrategy #InvestmentTips #FinancialFreedom
We affirmed the absolute rights, set forth in your State’s LLC Law, for ANY Member to request copies of the three most recent years Federal and State tax returns issued by the LLC.
As well as financial statements. Including the Statement of Cash Flows. [Topic of a future post]
Why? Those returns will give you some insight into the integrity of the Syndicator, as well as raise red flags of a possible Ponzi scheme taking place with your money.
Let’s look at the balance sheet again on the IRS Form 1065. Go to this link, the IRS Form 1065. Scroll down to page 6, Schedule L, Balance Sheet per Books.
https://www.irs.gov/pub/irs-pdf/f1065.pdf
Look at Lines 7a and 19a. These are the outstanding balances of loans to and from Partners and Related Parties. It actually says “Loans to Partner (or persons related to Partners)”. Notice that the next lines 7b and 19b are for actual Mortgage Loans. This helps with disclosure. You don’t want the actual mortgage loan mixed up with loans to and from Partners.
Who are Partners? Could be an individual Member of the LLC. Or could be another LLC formed by the syndicator.
For example, you invest in 100 Main Street LLC. You look at this balance sheet and you see $500,000 in loans to 200 Walnut Street listed on Line 7a. Huh? [It will appear as part of a supplementary statement to the tax return. If there is no explanation, ask for one]
Why on Earth is YOUR LLC owed money by 200 Walnut Street LLC? That means that some of the cash you invested in 100 Main has been loaned to 200 Walnut Street. Got that?
And why-oh-why would that happen? Well, maybe the Syndicator of YOUR LLC, 100 Main Street, also has formed 200 Walnut Street, and is short of cash. Why? Well, maybe he took too much out for himself. Just sayin’. And the new money coming in to 100 Main is a good source of cash to make up the shortfall. . .
You see how this goes? You may be in a Ponzi scheme. Maybe. This goes for the other side of the balance sheet, where the LLC now OWES money to another LLC. Same reasons.
Here's the thing, though. Another right of an LLC Member is to get copies of all Operating Agreements. Read the Operating Agreement.
Is your LLC authorized to incur debt without Investor approval?
Here are five dangerous provisions to watch for in an Operating Agreement:
Dangerous Provisions to Watch:
Authority to incur debt without investor approval
Power to make loans to other entities/projects
Ability to cross-collateralize with other properties
Permission to use investor capital for other ventures
Commingling of funds across different projects
Why These Are Potential Ponzi Indicators:
• New investor funds could be used to pay existing investors
• Project-to-project lending can mask poor performance
• Cross-collateralization puts your investment at risk for others' failures
• Commingling enables masking of financial problems
• Lack of project segregation enables fraudulent schemes
Protective Measures to Look For:
Strict single-purpose entity requirements
Project-specific bank accounts
Debt limitations and investor approval requirements
Prohibited related-party lending
Clear fund segregation requirements
Professional Best Practice:
Request bank statements showing separate accounts for each project. If a sponsor resists this basic transparency measure, consider it a serious warning sign. We discussed this in an earlier post.
Obviously, if loans are being made without any provision in the Operating Agreement, it’s time to get in touch with your State Securities Protection Division - usually a part of the State Attorney General Consumer Protection Agency. Here is NJ: https://www.njoag.gov/about/divisions-and-offices/office-of-...
And then you could contact SEC Enforcement: https://www.sec.gov/submit-tip-or-complaint
I have found that a carefully written letter to the Syndicator, alerting him that you are suspicious, will get you a quick refund . . . under certain conditions. Your first step is to contact a savvy CPA.
You, as a Member of an LLC, by virtue of the LLC records provisions in the LLC law, have as much disclosure access, and more, than a shareholder of a public company.
Try getting a copy of Tesla's tax returns . . ."Hey, Elon, Buddy. Now that you are in charge of DOGE, can you send me a PDF of the Tesla Consolidated Tax Returns, Federal, State and City for 2023, 2022 and 2021?"
Assert your rights!!!
A reputable Syndicator will be glad to disclose information pursuant to the LLC law, Period.
[Disclaimer: This information is a service to Clients and other readers for educational purposes only. Nothing in this post should be construed as, or relied upon, as legal advice or as creating a CPA-client relationship.]
Thanks, Aaron. How about a "Vote"? Best.
Thanks, Aaron. Check out my post today on reading the balance sheet. I call it "Inside Baseball". Kindly Vote on my posts, please.
We noted that Members of LLC's have the statutory right, under State LLC law, to get copies of tax returns and financial statements. We referred to Colorado, as an example. Here are the similar provisions for New York State.
Go to this link, the IRS Form 1065. Scroll down to page 6, Schedule L, Balance Sheet per Books.
https://www.irs.gov/pub/irs-pdf/f1065.pdf
Now that you have obtained a copy of the LLC tax return, in accordance with your rights, let’s focus on two elements of the balance sheet: Line 1 Cash, and Line 13 Other Assets.
[The BIG number you want to look at would be on line 7a and 19a - Loans to and from Partners and Related Parties. Another post!]
[1] Line 1 Cash. Does this LLC have any cash? Simple question, right? I have seen tax returns where the cash is not stated. The Managing Member may respond that the cash is held "in escrow" by their Attorney. Now, go away and don't ask any more questions . . .
You have a right to ask for a copy of the year-end bank statement. December 31, 2024. The ending balance should agree with what is on the tax return. Period. If you are told that the cash is held by the attorneys in escrow, ask the attorneys to verify, and mumble something about IOLTA, and whether interest is being paid. In any event, there is commingling going on, which is not good. [If you ever want to see an Attorney sweat, tell him that you think there is an IOLTA violation]
[2] Line 13 Other Assets. Look for the components of this. What are you looking for? Syndication Costs. The money spent on forming the LLC and, importantly, the commissions paid to salesmen to sell the LLC. Those commissions are usually ten percent, and should be disclosed in the selling documents. Thus, if the LLC raises $3M, you would expect to see $300k in commissions.
Why are we looking for this? Syndication Costs, by tax law, IRC §709, must be shown as an asset, and cannot be written off in any way. No amortization. This means it can’t be expensed, which increases losses [which is favorable]. So, the Managing Member, by not showing this on the balance sheet is NOT following the law. And the CPA who prepared the return is, uhhh, acting unprofessionally. Secondly, perhaps commissions in excess of what is disclosed in the selling documents, are paid. Who wants to disclose that number?
Simply put, Syndication Costs are the amount of sales proceeds [the money raised in the Offering Memorandum] which are NOT being invested in property acquisition.
So, while this is often overlooked to a reader of financial statements, for those of us who actually prepare these returns, it’s a telling sign of the integrity of the Managing Member. Non-amortizable. Includes sales commissions, securities registration fees, costs of marketing the interests, broker fees for selling interests, sales literature printing. IRC §709(a), Regs.§1.709-2(b), Regs. §1.709-2(c).
This is "Inside Baseball".
[Disclaimer: This information is a service to Clients and other readers for educational purposes only. Nothing in this post should be construed as, or relied upon, as legal advice or as creating a CPA-client relationship.]
Everyone on BP is entitled to their own opinion.