All Forum Posts by: Bruce D. Kowal

Yes, and No. When you get to sell the property, it gives you an advantage to have a Cost Segregation study.  At least that is what I hear.   Can't quantify it.  But Cost Sen studies have been so over sold, it may fetch you a better price, or terms, other things being equal.  

And, yes, you don't get any current savings if you can't use the losses.

After 20+ years in real estate partnerships, here's what actually puts you on the IRS radar (and what doesn't):

REAL Red Flags That Matter:

1. The Partner Complaint Trigger

• Disgruntled partner files Form 8082
• K-1 disputes
• Partnership disputes leading to tax filings
  Real Impact: Instant IRS attention

1. Suspicious Loss Claims

• Losses exceeding investment
• Artificial basis inflation
• Sudden large losses without economic reality
  Example: $100K investment claiming $500K losses

1. Related Party Games

• Circular property flips
• Below-market transfers
• Family partnership schemes without substance
  Watch Out: IRC §267 and §707(b) violations

1. Debt Engineering Red Flags

• Basis inflation schemes
• Artificial guarantee arrangements
• Partner debt shifts near year-end
  Critical: IRC §752 compliance matters!

1. Syndication Reporting Issues

• Missing Form 8918 for reportable transactions
• Inconsistent investor disclosures
• Required registrations skipped

What Doesn't Actually Matter:
(Despite What Your Uncle's CPA Says)

1. Special Allocations

• Normal promote structures
• Standard waterfall provisions
• Typical developer promotes
  Reality: Unless extremely aggressive, IRS rarely cares

1. Technical Documentation

• Minor §704(b) gaps
• Capital account glitches
• Technical allocation language
  Truth: Unless hiding something bigger

1. Property Value Allocations

• Normal basis step-ups
• Typical appreciation splits
• Standard promote calculations

Real World Example:
🏢 100-unit apartment complex
4 partners, $5M deal
Developer promote structure
= Zero IRS interest

Same Deal With Red Flags:
🏢 100-unit apartment complex

• Hidden partner arrangements
• Artificial loss allocations
• Unreported debt shifts
  = IRS Attention

Practical Protection Steps:

1. Basic Documentation
   ✅ Clean operating agreement
   ✅ Economic substance
   ✅ Partner contributions tracked
   (Don't need War & Peace complexity)
2. Economic Reality
   ✅ Allocations match economics
   ✅ Real money movement
   ✅ Actual partner participation
3. Clean Reporting
   ✅ Consistent K-1s
   ✅ Required forms filed
   ✅ Clear communication

The "Sleep Well" Test:
Can you explain your structure to an IRS agent without sweating?

• Normal promote? ✅
• Standard split? ✅
• Real money invested? ✅
  = You're probably fine

What Gets You in Trouble:

• Can't explain structure
• Hidden arrangements
• Too good to be true tax benefits
• Partner disputes

Bottom Line:
IRS cares about substance over form. Real deals with real economics rarely face allocation challenges. Focus on running a clean operation rather than perfect technical compliance.

Pro Tip: Your biggest risk isn't the IRS - it's partners who might complain to the IRS.

As a CPA focusing on real estate taxation, I frequently encounter property investors excited about cost segregation studies. And why not? The promise of accelerated depreciation and immediate tax savings is attractive. However, there's a critical detail that many tax advisors conveniently overlook when promoting these studies.

Here's the uncomfortable truth: If you're a high-income earner (AGI > $150,000) and not actively managing your properties, those promised tax savings might be locked away for years. 🔒

Let's break this down:

Under IRC §469, rental real estate activities are considered "passive" by default. Unless you qualify as a Real Estate Professional (which has strict requirements), your rental losses can only offset passive income. If you're earning primarily W-2 wages, interest, or dividends, those attractive depreciation deductions from your cost segregation study will be suspended.

Think about it this way: You might spend $10,000-$15,000 on a cost segregation study, expecting immediate tax savings, only to find those deductions suspended indefinitely.

Does this mean cost segregation studies are worthless? Absolutely not. But timing and planning are crucial.

Here's what you need to consider:

1. Future Passive Income: Do you expect to generate passive income from other sources?
2. Exit Strategy: When do you plan to sell the property?
3. Professional Status: Could you qualify as a Real Estate Professional?
4. Income Levels: Will your AGI decrease in future years below the $150,000 threshold?

Mitigation Strategies:

• Consider qualifying as a Real Estate Professional
• Generate passive income through strategic investments
• Plan property dispositions to release suspended losses
• Make appropriate grouping elections
• Structure leases to demonstrate active participation

The Bottom Line:
Cost segregation studies remain a valuable tax planning tool. However, understanding the passive activity loss limitations is crucial before making this investment. The time value of money still favors acceleration, but only if you have a clear path to eventually utilizing these losses.

Don't let your tax savings get trapped in passive activity loss limbo. Consult with a qualified tax advisor who understands these limitations and can help develop a comprehensive strategy aligned with your specific situation.

Remember: The best tax planning looks beyond immediate deductions to your complete financial picture. 📊

Bruce Kowal, CPA, MS Taxation
#RealEstateTax #PassiveActivityLoss #TaxPlanning

IRS CP2000 Notice: Why Real Estate Investors Need to Think State & Federal

Quick story that could save you thousands in tax exposure...

Had an investor client who received a CP2000 notice for unreported rental income. Everyone said respond immediately. We didn't. Here's why:

The Multi-State Chess Game:

• Client had properties in 3 states

• Each state has different deadlines to assess taxes

• Federal changes trigger automatic state assessments

• Timing the response saved $45K in state taxes

🏠 Real Estate Investor Pro Tip:

States can't assess back taxes if their statute of limitations expires before federal changes finalize. Strategic timing matters, especially with multi-state portfolios.

Real Example:

Investment property sale in 2019

Federal noticed unreported gain

Two states involved

Timed response to fall after state deadlines

Result: Only federal adjustment applied

Investors: What's been your experience handling tax notices across multiple states?

Want to dive deeper into multi-state tax strategies for your portfolio? Drop your questions below.

#RealEstateInvesting #InvestorTips #PassiveIncome #RentalProperty #Multifamily #TaxStrategy

Hey BP Family! Let's wrap up our QI selection series with the human element - because relationships and reputation can make or break your exchange! 🤝

[I am not sure I fully understood what I was getting into when I undertook this research.  But the entire §1031 field is very misunderstood, and opaque.  By and large, QI's have very high ethical standards, and are sometimes overlooked as the engines of this tax saving tactic.]

REPUTATION MARKERS 📊

INDUSTRY STANDING

Membership in professional organizations

Leadership roles in FEA

Educational contributions to the industry

Relationships with major title companies

CLIENT RELATIONSHIPS 👥

Testimonials from CPAs and attorneys

References from title companies

Long-term client relationships

Transparent fee structures

RELATIONSHIP RED FLAGS 🚩

Overly familiar with your realtor/broker

Kickback arrangements (illegal!)

Pressure to use affiliated services

Hidden fee structures

PROFESSIONAL BOUNDARIES ⚖️

Good QIs maintain:

Clear fee disclosures

Written policies

Professional distance

Ethical guidelines

WATCH OUT FOR 👀

QIs who:

Push investment products

Offer tax or legal advice without credentials

Suggest "creative" solutions

Promise guaranteed returns on exchange funds

BEST PRACTICES FOR VETTING 📋

Check multiple references

Verify professional memberships

Research online presence

Review complaint history

Examine years in business

INDEPENDENCE MATTERS! 🎯

Your QI should be:

Independent from your transaction

Free from conflicts of interest

Focused solely on exchange services

Clear about their role limitations

PRO TIP: Per IRC §1031(k), your QI cannot be:

Your agent

Your attorney

Your CPA

Your realtor

Your relative

within 2 years of the exchange!

RELATIONSHIP WITH YOUR ADVISORS 🤝

Good QIs:

Work well with your team

Respect professional boundaries

Communicate clearly

Stay in their lane

Remember: The best QI relationships are professional, not personal!

FINAL THOUGHTS 💭

Trust your instincts

Value experience over charm

Prioritize competence over cost

Document everything

Drop questions below! Share your QI experiences!

#WealthCreation #FinancialFreedom #RealEstateInvesting #InvestorLife #MoneyMindset #PassiveIncome #RealEstateInvestor #1031Exchange #TaxStrategy #InvestmentProperty #WealthBuilding #RealEstateSuccess #CashFlow #InvestorCommunity #RealEstateWealth

Hang on for the ride, Brandi!!!

 🎯 1031 Exchange QI Selection: Operational Competency Red Flags (Part 2/3)

What's up, BP Nation! 🏢

Following up on security concerns, let's dive into operational competency markers for your Qualified Intermediary. Because sometimes the biggest risks aren't about stolen funds - they're about blown exchanges due to incompetence!

OPERATIONAL COMPETENCY CHECKLIST 📋

DOCUMENTATION HANDLING 📑

Clean, professional exchange documents

Prompt response to document requests

Clear tracking system for deadlines

Written procedures for identification period compliance

STAFF EXPERTISE 👥

Dedicated exchange coordinators

Legal counsel on staff or retainer

Clear escalation procedures

Continuous training programs

WARNING SIGNS OF INCOMPETENCE 🚩

Confusion about basic §1031 rules

Unable to explain identification rules clearly

Missing or inconsistent tracking of key dates

Poor communication during critical periods

No backup personnel for your coordinator

TECHNOLOGY INFRASTRUCTURE 💻

Look for:

Secure client portals

Automated deadline notifications

Electronic document storage

Real-time transaction tracking

COMPLIANCE RED FLAGS 🚨

Suggesting aggressive interpretations of §1031

Unwillingness to provide written guidance

Casual attitude toward identification rules

Pushing timeline boundaries

EXPERIENCE MATTERS! 📚

Ask about:

Years in business

Number of exchanges handled annually

Experience with your property type

Handling of failed exchanges

PRO TIP: Test their knowledge! Ask them to explain:

The 3-property identification rule

The 200% rule

The 95% rule

Under Treas. Reg. §1.1031(k)-1(c)(4)

COMMUNICATION RED FLAGS 📱

Slow response times

Unclear instructions

Poor documentation

No weekend emergency contact

No backup personnel

Remember: Your QI should make you feel confident, not confused!

#RealEstateInvestor #PassiveIncome #WealthBuilding #InvestorMindset #RealEstateSuccess #1031Exchange #TaxStrategy #InvestmentProperty #CommercialRealEstate #RealEstateWealth

Good Grief!  DIY vs CPA. Always a lively discussion.  Price the cost of four new tires for your SUV. Then compare that cost with getting your taxes done correctly.  Taxes will easily take 30% of your income.  Got to put all this in perspective.  

🔄 The Side-Hustle Timeline: How to Build Your RE Business While Working 9-5

Ever feel like your W2 job is holding back your real estate dreams? Let's break down a realistic timeline for building your REI business without burning out or risking your day job. (We hope, right?)

⏰ The 168-Hour Reality Check:

Your week has 168 hours. Assuming:

40 hours: W2 job

56 hours: Sleep

21 hours: Basic daily tasks

= 51 hours potential REI time

💡 Pro Tip: It's not about finding time; it's about allocating the time you have strategically.

🎯 Your 6-Month Timeline:

Month 1: Foundation (5-7 hours/week)

Morning routine: 1 hour daily market research

Evening routine: Deal analysis practice

Weekend: BP forums & networking

Key Goal: Analyze 10 deals on paper

Month 2: Education (8-10 hours/week)

Complete 1 RE course

Join 2 local REI groups

Schedule lunch breaks with agents

Key Goal: Build your initial power team list

Month 3: Systems (10-12 hours/week)

Set up deal tracking system

Create document templates

Establish banking relationships

Key Goal: Ready to make offers

Month 4: Lead Generation (12-15 hours/week)

Drive neighborhoods after work

Weekend open houses

Setup automated MLS alerts

Key Goal: Generate first 5 qualified leads

Now, the Owners and Brokers you deal with may not enjoy this, but you can certainly "practice" making offers.  It is not illegal to make an Offer.  Right?  So, perhaps you make a few offers which you know are unrealistic.  This allows you to test all the systems and the people involved.  And be sure that your offer can be rescinded upon inspection.  Maybe one of your lowball offers gets accepted.  Then what will you do?

(You won't make any friends. But it's YOUR money, and Real Estate, to put it mildly, is a contact sport).

Month 5: Deals & Network (15-18 hours/week)

Submit first offers

Attend 2-3 REI events monthly

Build social media presence

Key Goal: First offer accepted

Month 6: Scale & Automate (15-20 hours/week)

Delegate initial tasks

Establish morning/evening routines

Create follow-up systems

Key Goal: Sustainable weekly schedule

🚫 Common Pitfalls to Avoid:

Overcommitting early

Neglecting W2 responsibilities

Skipping system creation

Taking on too many mentor calls

✅ Success Markers:

Consistent daily actions

Growing network

Clear systems

No work conflicts

Steady deal flow

Maintained energy levels

👉 Action Steps This Week:

Audit your current schedule

Block 2 hours daily

Choose your power hour (morning/evening)

Set 30-day milestone

General Comment:  obviously not everyone will follow these suggestions.  But what it does provide is a framework. A general from-here-to-there guide.  You tailor all this according to your unique needs.

Real talk: How are you currently balancing your W2 and REI activities? What's your biggest time management challenge?

#BPWIN #RealEstateInvesting #SideHustle #CareerTransition #REINewbie #TimeManagement #InvestorLife