All Forum Posts by: Dave Toelkes

@Jameson Hedin

Answering your last question:  When married filing jointly, the 15% capital gains tax rate kicks in when your 2020 TAXABLE income goes over 80K.  Taxable income includes the capital gain on the sale of your primary residence.  You say that your property has appreciated significantly, so the first $500K of your sale profit is tax free, but anything over $500K is included in your taxable income.  That portion of your capital gain that puts your taxable income above $80K but less than $496,601 will be taxed at the 15% capital gains tax rate.

@Shan Vincent

If you sell everything you own and pay off all your debts, the amount left over is your net worth.

If your net worth is less than the limits of coverage provided by an umbrella insurance policy, I would go with the umbrella policy. An LLC is not a substitute for liability insurance. You will still need hazard insurance even if your property is owned by an LLC, so why not just pay nominal premium to include as much liabllity coverage as your insurer will allow. Umbrella insurance policy will provide additional libility insurance coverage to your entire estate.

@David de Luna

i am assuming that your intent was always to flip these properties.  If this is the case, then your tax return does not reflect these properties as"acquired" in your inventory until the year of sale.  If you acquired the property in 2019 and flipped it in 2020, the property "acquisition date" on Schedule C would be Jan 1, 2020.  It would appear that the CPAs you are talking too are not well versed on the tax treatment of dealer realty.  Bottom line, you do not have any recognized flip inventory or any direct property expenses on your tax return until the year of sale, and then only in the year of sale.  At the end of the tax year, your cost of inventory on hand reported on Schedule C will be $0. 

Your bookkeeping is another issue.  You DO want to add the flip properties to your bookeeping asset inventory as they are acquired and accrue all direct property costs you incur until the property is sold.  In the year of sale, your Cost of Goods Sold for the flip property is the total accrued cost of the property to include acquisition cost, repair/rehab, maintenance, and other holding costs such as property taxes, insurance, and utiilities.

While dealer realty is considered merchandise (inventory) to your flipping business, the tax treatment of your inventory is not the same as for a traditional retail business such as a hardware store.  

Just how I see it.  Don't hire a CPA who can't answer this question correctly.

I require all my tenants to have renters insurance.  Then, when faced with a large repair expense clearly due to tenant abuse, a claim against their insurance would cover the cost of the repairs.  

In your case, I believe the repairs are deductible against your rental income.  I would capitalize the carpet replacement and depreciate as five-year property.  .Enev though the roof repair was covered by your insurance, the duductible can be expensed as a reair item.  Just how I would handle it.

I wowuld still keep the proprety in service as a rental.  If you keep as a second home, then you have to furnish it at your expense.  Then if you decide to convert back to rental, what will you do with all the furniture?  I you convert to a short term rental, your rental income may be treated as non-passive income.  I think it would be more prudent to keep the property in service as a rental and generate passive income.  Short term visits to family would be a lot less expensive for you it you stay in a hotel and let your property ontinue to generate rental income.

Better tenant screening and a renter';s insurance requirement may reduce the probability of a repeat of your recent experience.  If long-distance managment also hindered your ability to stay on top of your tenants, then outsource property management to local professionals.

Your options are to keep the property as a rental or convert to a second home.  Run the numbers and let the economics of each option influence your decision.

Reference some of your other questions:

• How does the personal conversion work as far as if we will be reporting a huge loss for the property?  I would not prorate rental losses.  Once the repairs are complete deduct rental losses and capitalize capital improvements to the rental property as I suggested above.  Then, make the decision to either obtain a new tenant or take the property out of service.
• How to we handle capital additions to the home for the period it is used for personal use? E.g., can a new deck or fence be add once we use it add to the cost basis once we convert it back to a rental?  Regardless of whether the property is in service or personal use, capital improvements are capitalized.  If the property is in service, then you can recover your capitalized costs through an annual depreciation expense.  If the property is personal use, capital improvements are added to your tax basis, and hopefully recovered when you sell the property.  If the personal use property is converted back to a rental, then the cost of capital improvement during your personal use period are included in your depreciation basis for rental.

@Mike H.

The unforeseen circumstances section of the tax code was intended to apply to those owners who had to sell within their first two years of ownership.  These owners would have been able to meet the two years of ownership and occupancy tests if it were not for unforseen circumstances.  This section of the tax code also provides a pro-rata mechanism for applying a reduced capital gains exclusion to the period of time less than two years of ownership if the sale forced by unforseen circumstances qualifies.  

One option that has not been throuroughly discussed is to do a §1031 exchange for an investment property that you will convert to your primary residence after two years of rental use..  The §1031 will defer capital gains on the exchange.  After two years of rental use, convert the property to your primary residence.  With this strategy, there will be somecapital gains tax due whenever you sell your primary, but, the taxable gain will be prorated according to length of time rused as a rental vs primary residence.  The longer you occupy as a primary residence, more of your gain can be excluded under §121.

There are no capital gains taxes on your flips, it's all ordinary self-employment income.  Just include the flip income with your real estate commissions when you calculate your quarterly estimated tax.  Unless your profit on the rental was really large, don't worry about that one.  Your capital gains tax rate could be 0%.  I would let that one fall out at the end of the year on the expectation that your quarterly estimated tax payments will total at least 90% of your total tax due for the year 

@Eric Littlepage

First, all repairs are deductible regardless of cost unless those repairs are part of a larger improvement project.

The 2% rule you are asking about is a guideline that allows certain small costs to be expensed that would otherwise be capitalized as improvements provided the total cost of all repairs, maintenance and improvements throughout the year does not exceed 2% of the original cost basis of the dwelling structure or $10K whichever is less.  In your case, if you paid $85K for the property and you allocate $15K of that to the land value, then the initial basis of your dwelling structure would be $70K.  If during the tax year, the total cost of all repairs, maintenance, and improvements is not over $1400, then you can expense the improvements rather than capitalizing them.

@Josh M.

The depreciation basis is determined by the lower of

• what you actually paid for the property, or,
• its FMV at the time it is converted to rental use.

If the rental is producing a positive cash flow, do we really care what the interest rate is?  The tenant is paying the interest which you get to deduct on Schedule E.