All Forum Posts by: Cory Vitale

@Brian Scott don't forget to incorporate the tax savings into your calculations too! It's entirely possible that you can deduct mortgage interest, utilities, property taxes, insurance, repairs and other expenses associated with the portion of your property which is rented to others. There are allocation methods allowable in order to do this. If your expenses associated with the rented portion exceed the income, you may have a tax benefit if you are eligible to deduct passive rental losses from your other sources of income. More details at the link below under "Renting Part of Property."

I did this several times using duplexes and triplexes over the years before I decided to become an accountant. I was able to withhold less from my W-2 income in anticipation of these savings, providing me cash flow in my pocket each time I got my paycheck.

It could be beneficial to engage an accountant to help you assess the cash flow and determine if you are maximizing potential cashflow derived from taxes!

2023 Publication 527 (irs.gov)

@Enrique Lopez this option wasn't always available. Congrats on pursuing an awesome strategy! I've house hacked 4 different times and never regretted it. 

@Haemi Jung A 1031 exchange is not a bad option if you have a gain on the property. But I once did one to save a couple thousand bucks, and it cost nearly that much just to hire the Qualified Intermediary.

Also, I found myself wanting to move into the property I exchanged, which is a no-no without allowing a couple of years to pass under a safe harbor. If you think you might be in a similar situation, make sure to consult a professional. To other points made on this thread, occasionally the juice isn't worth the squeeze. If it is--good for you! I have a great 1031 intermediary I'm happy to recommend.

@Basit Siddiqi hit the nail on the head. @Chris Seveney is also correct in saying "it depends." If you have a partnership structure or some other facts and circumstances around the loan that indicate you are extending it in the capacity of a trade or business, it will be considered ordinary income.

Keep in mind that the tax rates will not differ between ordinary and passive income unless you sell the loan for a gain/loss. Absent that, the big differences will be which forms you report the income, your ability to deduct business expenses against the income, and applicability of self-employment taxes. 

I have a client who wrangled with this question in particular and we were able to get it all sorted out pretty quickly.

@Dave Hart I am so sorry for your poor experience. I've networked with a lot of great accountants (including those who have replied here) and can tell you that your experience is not representative of the over 70 accountants on Bigger Pockets who mostly want to work alongside you to add value to you.

Thanks for calling this out and helping keep your fellow investors informed!

@Kevin Lorick I'm not sure I'm in the market for it now, but I've done private loans in the past and actually found a borrower through Paperstac, even though that site is typically used for buying and selling paper rather than direct origination. 

If you haven't already, you might have some luck making a listing there for the properties because you'll be targeting fixed income investors looking for yield. 

Best of luck on your deal!

@Cindy Auch As others here have indicated, this is one of the more involved questions for those earning income as private lenders."It depends" rings particularly true. 

In my experience with a specific client of mine, it can often be challenging to make the case for passive income (therefore SE tax avoidance) if you are also a real estate investor doing your own flips. This could bring real estate dealer status into the equation under some circumstances. As @Chris Seveney@Chris Seveney points out above, often the income winds up being ordinary and subject to SE tax. Depending on your level of income from those investments, you could be better off biting the bullet and accepting the ordinary income classification while exploring SE limiting strategies like forming an S-Corp. Hope this helps!

@Matthew Samson I definitely don't recommend going with a higher cost provider until your portfolio is a little further along. That said, there is still good advice out there that accountants can offer to you. For instance, I began as a real estate CPA after building out my own portfolio personally. 

Accountants in a similar situation probably have some advice that can help make sure you set yourself up from a software implementation, bookkeeping, lender sourcing situation. You could spend as much money as a CPA costs in missed opportunities because you don't have good optics into your business, or because your tax returns (often used by lenders to qualify you for loans) don't maximize your opportunities. Also, someone with real estate investing experience can probably help you shop for loan products that could be more flexible on the owner occupancy requirements so that you can scale at whatever pace you want. (I survived being a house hacker four times myself, so I get it!)

Finally, to answer your other comments, I think the exact right answer depends on your future intentions. While renovations and other expenditures can be capitalized (and in some scenarios deducted) when you classify property as a rental, that might not be a significant impact if you intend to sell the property soon and can qualify for the 2 out of 5 year deduction for primary residences. 

There are also some awesome tax benefits that you can take advantage of at certain income levels when you are a W-2 employee with passive real estate investments.

Also, your classification of the property as a rental has no bearing on the fact that you should be tracking your basis. When you convert to a rental, the basis for depreciation becomes the lesser of the fair market value or adjusted basis on the date of conversion. Therefore, in many cases, you will be able to subsequently depreciate anything that adds to your basis once you convert the property, though immediately deductible expenses will not be available until you convert the property.

Hopefully this was helpful. Best of luck!

@Matthew Samson I'll jump on the one CPA bandwagon and provide some additional context to hopefully add some more value to your process. Most CPAs have the research skills and experience to sort out state-specific issues. 

The vast majority of states also leverage figures on a federal return as a starting point to define taxable income, making adjustments to those figures to arrive at the portions of income that are taxable for state tax purposes. 

Notably, Pennsylvania is one of the five states that has a specific definition which doesn't rely on figures found on federal returns. As a remote CPA, I believe that clients' expectations can be exceeded regardless of their location. 

However, an initial glance suggests that a Pennsylvania CPA may have processes in place to address quirky Pennsylvania calculations and the federal tax prep experience to more easily research unfamiliar Georgia issues. The reverse may be a little less ideal. 

That said, above all else, I would prioritize experience far more when making your selection than the physical location of your tax professional. Good Luck!

@Alex Boulger while I've never done this personally (yet) I don't see anything that will disqualify you as long as you meet the 2 of 5 year criteria for Federal purposes. From my topical research, Tennessee doesn't levy any state income taxes at all, so, acknowledging that I don't have all of the information, you may owe no state income tax.

Also, I would like to clarify that failure to qualify to a 1031 exchange would be irrelevant to you if you qualify for the 2 of 5 year exclusion.