All Forum Posts by: Bruce D. Kowal

Ask ODC for a copy of the most recent tax returns, then show those to your CPA for an opinion.  

You have an absolute legal, statutory right to those tax returns if it's an LLC.  Make the request through their Registered Agent

See my posts from January 2025 on this topic.

Yes.  That was my reference to the popular tax prep program, we will call "HyperTax".

Also, in wondering how this return got selected, I have heard from very very reliable sources that IRS is using AI.  And it would not surprise me if the selection criteria would be:

Select for Examination where both Spouses have W2 income AND the Taxpayers claim material participation on Schedule E, line 43.  

In programming language, "where the value of Schedule E,  line 42 is negative."

Maybe they set a limit of, say, $50,000 for that value on Schedule E.

If this is what they are doing, more power to them.  Good use of AI with limited Manpower.

Now, maybe they will go after all those Notes Payable/Receivable on S Corps and LLC's and look for interest income and expense.

Hey, Mike.  Thanks for your comment, Buddy!

Recent case with a new Client who use a well-known self-prepare tax program, let's call it "HyperTax".   Got confused with the questions regarding Material Participation and elected that status.  Got audited by IRS.  Which is rare.  They have limited Manpower and a Form 1040 with a Material Participation election, well, you would think they had bigger fish to fry.  But no.  They assigned a  Revenue Agent, and issued a document request.  Well, the Taxpayers thought that they were safe, because they bought the Audit Protection service, which is NOT part of HyperTax, but is a separate company.  

So, what did the Taxpayer get for their Audit Protection?  Well, the job of protection went to an Enrolled Agent, who apparently did this as a sideline, because he notified the Revenue Agent that he had to delay any response until after 4/15.  

When the EA finally got around to dealing with the audit, all that he did was agree with the Revenue Agent  on every assessment which IRS made. And to make matters worse, the EA did not provide documentation for Schedule E expenses, despite the fact they they were available.  Which greatly puzzled the Taxpayers.  The final tally, plus interest and penalties was a little over six figures.  (I don't want to give dollar amounts).  

In the end, I got Power of Attorney, and we ended up getting all penalties abated, and all operating expenses accepted.  On the issue of Material Participation, the facts were not with the Taxpayers.

(Now, many EA's are crackerjack reps for dealing with IRS.  I was just listing his qualifications to represent a Taxpayer.  There are three:  CPA, EA and Attorney at Law.)

Lesson:  that HyperTax program has caused a lot of pain for a lot of taxpayers when the issue is beyond a simple W2 and some bank interest.  For Multistate real properties and Material Participation, it will cause you grief.  And as for audit protection, I would not rely upon it.

There.  Anyone else have a tale dealing with this?  I don't want to mention the name of the program, lest their lawyers throw a hissy fit with BP Management. 

1]  If you have any ability with a AI program, upload the Operating Agreement and find out if what they are doing is permitted.  I use Claude Sonnet 4.0 from Anthropic.  Once that doc is uploaded, you can specifically ask if what they are doing is permitted.

2]  If you have any interaction with them, I recommend that you contact them through their Registered Agent, using Certified Mail.  it will get their attention. 

3]  You have the right to view their actual financial statements and tax returns.  See my posts on this topic from January.  And, after reviewing these dox, run them by your AI buddy to see if any transactions were NOT in the Operating Agreement,

4] While you presume that this is just a case of bad luck, there may be some fraud involved.  Just sayin'.

I've been analyzing real estate investment strategies for two decades, and there's a powerful wealth-building approach I rarely see discussed here that's worth your attention.

The "Dual Engine" Growth Strategy 🚀🚀

The most financially resilient investors I work with don't just focus on adding doors to their portfolio. They create a two-pronged approach:

1️⃣ Traditional real estate wealth building (appreciation, loan paydown, cash flow, tax benefits)
2️⃣ Strategic allocation of a portion of cash flow to permanent insurance with living benefits

This isn't about buying insurance - it's about engineering a financial ecosystem where your assets work together synergistically! 🔄

Why This Matters to BP Investors 🤔

Let's run some realistic numbers...

Starting Point:

• $300K rental property (25% down)
• $2,200/month rent
• $1,700/month expenses (including mortgage)
• $500/month net cash flow

If you allocate $400/month to a cash-value policy with LTC protection:

After 20 Years:

• Property value: $541K (+$241K)
• Loan balance: $125K (down $100K)
• Insurance cash value: $146K
• Total wealth increase: $487K 📈
• PLUS living benefits protection throughout

The Hidden Tax Advantages 🧠💵

The tax implications are where this strategy really shines:

• Real estate sale after 20 years could trigger ~$100K in taxes (capital gains + depreciation recapture)
• Properly structured policy loans can be accessed with zero immediate taxation

This creates incredible flexibility in retirement - you can pull income from whichever source makes the most tax sense each year!

This Isn't Your Grandpa's Insurance 🚫👴

Modern policies designed for this strategy focus on maximum cash accumulation with minimal insurance costs. When structured correctly, they become powerful wealth-building tools that complement real estate perfectly.

The BiggerPockets Advantage ⭐

As real estate investors, we already understand leverage, cash flow, and long-term wealth building. We're uniquely positioned to benefit from this strategy because our properties generate the cash to fund both growth engines simultaneously!

I'd love to hear your experiences with this strategy! Drop a comment below about:

🤔 How are you currently diversifying your real estate cash flow?

💭 What's your biggest concern about retirement planning beyond your real estate portfolio?

📚 Tax planning makes all the difference in these strategies!

🔄 If you've implemented something similar, what results have you seen? Let's learn from each other's experiences!

💡 Want to dive deeper into these concepts? 

$700 monthly is cheap, if it enables you to avoid hiring a bookkeeper.

Hi, Steve.  I really can't give specific tax advice here.  What you think are the complete set of facts, may still be lacking.  What does your CPA say?  You can reach out to me on BP personally. 

You are correct.  

Did you notice my item #6?  

[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!!!]

If you ask it specifically to verify, it will very likely demur, and not give you any.

I use Claude 3.6 Sonnet.  And when asked to verify, it will acknowledge that it gave some misleading responses.  ALWAYS, ALWAYS, after every response, ask Claude to verify.  And if something does not make sense, ask again.  

But overall, on an issue such as Material Participation it will give an informed response.  And spare you from Taxpayers asking you a bunch of What-If's, for no compensation. 

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?