All Forum Posts by: Bruce D. Kowal

Try some Meetup groups, like this:  https://www.meetup.com/real-es...

Have you tried the Corcoran Group?  They absorbed the Citi-Habitats business.  https://tsun.citihabitats.com/...

The property is investment property.  In tax terms this is §1231 property.  You can always deduct expenses incurred to maintain your investment, such as repairs, taxes.legal fees etc.  Now, when you are spending big money to fix up the property, capital improvements, those costs can only be depreciated when the property is ready to be rented.  Current carrying expenses, always deductible in the year incurred.  Depreciation of capital improvements -  only when held out for rental.   And if it takes some time to get rental income, you can still take depreciation, because you are holding it out for business.

As for an IRS audit of your passive-loss generating STR, you are allowed to take those losses up to $25,000. Why? You are an Active Participant in rental real estate, and with your income less than $100K. IRC §469(i)(6)(A). I think your chances or being audited are slim - unless you are also buying and selling cryptocurrency and not disclosing this.

Consult with a CPA or an EA for the specifics in your case.  "Active Participation" has a legal meaning.

You  are not making money with $8/gallon gasoline in CA?

In broad terms the greatest benefit is the ability to depreciate borrowed money.  A building costs $100,000.  You put 10% cash down.  That is the amount at risk.  You borrow 90%.  You can write off the cost of the entire building, even though you only have $10,000 in the property.  That's the break.  Plus, as mentioned above, the ability to defer paying tax on gains from selling the property.   Together:  you can throw off "paper" losses which offset your W2 and other income, and when you sell the property you can put off paying taxes.  That's it in a nutshell.

You can't save every Puppy in the pound

One way to get your feet wet locally is to find a 4 Plex on Staten Island that is in a neighborhood which you KNOW is safe.  Find out the name of the Owner, and ask him if it's for sale.  And if he MIGHT consider an offer.  Ask  him for the rent roll and the operating expenses.  Find the name of the Owner on NYC ACRIS.  Do this a lot, pretend to be Buyers, get a P&L and start to compare.  Find a broker to help, if needed.  But you would be wasting him time, to be  honest. [I am next door in Bayonne. Hate getting trapped on the SI Expwy Westbound.

What Does Effective Tax Planning for Real Estate Investors Look Like?

A lot of Investors on BP recognize that they need something more than a trip to H&R Block at the last minute.

1] At the very basic we want to use losses in the current tax year, and we want to postpone or defer capital gains. In TaxSpeak we want any losses to be Non-Passive, and capital gains deferred with an IRC §1031 exchange. (Sometimes we may not defer the gain.)

2] We recognize current losses as either an Active Participant, or as a Qualified Real Estate Professional who is a Material Participant.

3] Those are the basics. Much planning consists of meeting the tests for Material Participant, and grouping multiple properties.

A few definitions and explanations. Active Participant – such Taxpayers can recognize losses from rental real estate up to $25,000 if their Modified Adjusted Gross Income is below $100,000 [Married Filing Joint]. As your MAGI reaches $150,000, that $25,000 gets reduced to zero. But, hey, it makes life simple for those with modest incomes who rent property. Not much planning here.

The real benefits for those with larger losses and larger incomes belong to Qualified Real Estate Professionals. QREP. Think of this as a Badge. A QREP Badge. If you can wear that Badge, then we measure how many hours you materially participate in real estate. So, the sequence is (A) get the Badge, and then (B) measure your involvement.

Both (A) and (B) are fraught with hurdles. This is where planning is needed.

4] A big hurdle for investors is understanding just how real estate income/losses flow through the tax return. Further the Taxpayer should understand in broad terms how the tax return will look in December of the current year. No one wants their CPA to surprise them in April. Get acquainted with “Schedule E”. If you plan, there are no surprises.

5] OK. So, how is this accomplished?

Right after Thanksgiving we prepare a Pro-Forma tax return. We begin with the prior year numbers and update with estimates. For example, that Salary can be projected with the 11/30 paystub. If there are brokerage accounts, we can plug in the 11/30 numbers. And interpolate as best we can.

As for real estate which is currently owned from the prior year, we update rent and expenses. Depreciation will remain the same, unless there are improvements.

In December is the time to educate the Taxpayer about how all this will flow. Perform alternative projections etc. Decide upon making estimated tax payments by Jan 15.

Thus by the time the return is prepared there are few surprises. That is the hallmark of planning. NO SURPRISES!

What does no planning look like? On April 1 the CPA presents a draft of the tax return which shows a balance due. No explanation. No discussion. Taxpayer may volunteer some additional information such as “Didn’t I tell you about X” or “I spent X dollars on such and such” and so forth. No one is happy.

6] During the year, there will be discussions about asset grouping, maintaining records to establish material participation, and so forth. Even getting a Qualified Intermediary to help with a §1031 deferral. Maybe a Delaware Statutory Trust.

And maintaining status as a Qualified Real Estate Professional, perhaps doing something creative. How so? Let’s say a Taxpayer works for a company involved in real estate. But the Taxpayer does not own > 5% of the his Employer. In that case, he is not going to get the Badge. Well, depending upon his relationship with his Employer, perhaps some of his compensation can be paid to him as an Independent Contractor. Now, that counts towards getting the Badge. That’s just an example of effective planning – ahead of the following April. That scratches the surface on planning for that Badge

There are certain traps in getting the badge for married taxpayers, some of whom may or may not work in real estate. Filing Separate or Joint can have a big impact. This is really where CPA’s add value.

7] So, planning is a continuous dialogue between CPA and taxpayer. Some professionals will bill each month for their time, others will let those hours accumulate as part of the final invoice when the return is filed. It depends.  Effective planning will cost more, no question.  Maybe an additional ten tankfuls of gasoline.   That's one way to think about it.

8] Certified Public Accountants, Enrolled Agents, and Attorneys are all licensed professionals. Be cautious when dealing with anyone without a license.

As a CPA I can tell you that Clients who pay us on time, in full, and at fair value for our service always get prompt attention.  Which means that Clients who complain about our fees, ask us questions throughout the year, yet don't want to be billed for our time, will not get such prompt service.  Try calling a lawyer with a question off the top of your head.  You will pay at least $50 for that.  Like anything in life, you get what you pay for.  

There is a joke in our business about the Client who asked when his return would be ready, and how much it would cost.  When told that it would cost $X, an amount which the Client deemed excessive, he was asked what he thought the return would cost.  The Client replied "One hundred dollars".  The CPA promised him that the return would be ready in thirty minutes.  If you want a cheap return, that's what you will get.

As for the rush during tax season, recently I encourage all Clients to make their estimated balance due payments by April 1.  Why?  A lot can go wrong if you owe money and you delay payment until April 15:  people die, get sick, files are hacked, computers fail, internet fails.  Sh-t happens.

Massive amounts of K-1's.  Educate that Client that the deadline is impossible to meet.  File extensions, and see that the Clients pay enough based upon forecasts.  If they overpay, apply to the !Q estimated tax payments.

Do tax return projections after Thanksgiving, so there are no surprises by April 15. Educate those Clients who need this, and add to the fees.

By March 31, everyone goes on extension for 1040's.  And by February 15 for entities.  As I wrote Sh-t happens.  

Mr. Plaks' observations are spot on.

One more thing. Ask you current CPA to run a tax projection in December, right after Thanksgiving.  This is a Pro Forma for what 2022 will look like.  All professional CPA tax programs have the ability to do this.  It is in December, when your CPA is not too busy, that you can ask:  show me the tax profit/loss form all my properties.  Show on the form itself, walk me through it.  Show me the depreciation schedule:  the original cost of the property, annual improvements etc.  

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