All Forum Posts by: Bruce D. Kowal

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?

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:

• You can only deduct home office expenses up to your net rental income
• If your rentals are already showing a loss, the home office deduction won't help
• Excess deductions carry forward to future years
• Must apply §280A limitations first, then passive loss rules

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:

• Calculate net rental income
• Apply §280A limitations [Consult your CPA on this!]
• Check passive loss rules
• Track carryforwards

Most small landlords will simply:

1. Take the simplified $5/sq ft deduction
2. Claim it if they have net rental income
3. Skip it if they're already showing losses

Pro Tips: 💪

1. Use the simplified method - it's $1,500 max (300 sq ft × $5)
2. If you're showing profits, take it
3. If you're showing losses, don't bother
4. Keep basic photos/documentation of your space

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.]