All Forum Posts by: David Cherkowsky

Quote from @Michael Plaks:

Since you're single, you have a few weeks before the end of 2024 to marry some full-time Realtor or a contractor. If your spouse qualifies for the Real Estate Professional status, then it will cover both of you. And THEN material participation will open the deductions for you. Again, with or without an LLC, same exact tax result.

 Lol thanks Michael! Maybe in 2025. 

Quote from @Michael Plaks:

Quote from @David Cherkowsky:

Material Participation: Material participation is the key factor here. If you materially participate in the LLC's operations, you may be able to treat the income as active.

Material participation in a rental activity, with or without an LLC, still runs into PAL rules. LLC does not overrule it.

Sounds like an LLC does me no good then. Appreciate you helping me save a few hundred bucks and headache in creating it.

Thank you @Ashish, @Natalie Kolodij, @Sean Graham, @Michael Plaks. Really appreciate the responses. One thing to clarify is that I am not married filing separately. I am single. Poor wording in the original post.

I emailed the CPA and said that the advise does not seem to be correct and received the following response:

"Forming an LLC alone doesn't automatically turn passive losses into active losses. However, if you materially participate in a business or real estate activity within the LLC, the income may be classified as active, which could allow the losses to offset active income.

Ex: Self-Rental: If you rent property to a business you actively run (like a business you own and operate), the rental income can be treated as active under the self-rental rule.

Material Participation: Material participation is the key factor here. If you materially participate in the LLC’s operations, you may be able to treat the income as active.

• a. Making significant management decisions
• b. Regularly performing or overseeing maintenance and repairs
• c. Actively marketing the property and handling tenant relations
• Cost Segregation: allows you to accelerate depreciation by breaking down the property into different components, such as personal property (appliances, carpeting, etc.) and land improvements (landscaping, parking lots, etc.), which can be depreciated over a shorter period typically 5, 7, or 15 years rather than 27.5. It can convert what would be a passive loss into a deduction against active income

You can do this all under your personal return w/out the LLC, but your losses will be limited even if you do a Cost Seg due to your AGI limitations."

Reading that reponse, and all of the responses in this thread, I'm not really seeing how the LLC would help the tax situation.

Thank you again for your time.

@Basit Siddiqi

@Andrew Strauss

@Katie Ripp

I received the following response:

"The more active income you earn, the less you can deduct from your rental property due to the phaseout of the Passive Activity Loss deduction. As your Modified Adjusted Gross Income (MAGI) increases, the amount of rental losses you can offset against your ordinary income phases out. However, a Partnership LLC can allow you to deduct 100% of your rental property losses, regardless of your MAGI. This is because losses in a Partnership LLC are generally considered passive or non-passive depending on your involvement, and the structure of the LLC can provide more flexibility in how losses are handled."

Does this sound right?

Quote from @Katie Ripp:

Hi David! 

First of all, congrats on the new rental property purchase! Very exciting. 

The special allowance for active real estate losses is up to $25,000 in otherwise disallowed (passive) losses, and the modified adjusted gross income (MAGI) phase out range is $100,000-$150,000. Meaning that if you make $100,000 or less, then you can deduct up to $25,000 in rental losses. If you make $150K or more, then $0 of your rental losses are deductible.

To clear up one other thing, depreciation is required to be calculated and deducted on a rental property. So it should still be reported on your tax return, but limited by the passive activity loss limitations referred to above.

Any rental property expenses and depreciation might not be deductible in the first year, but they carry forward to future years to offset future passive income (including the eventual sale/gain of that property). So very important to still report them on your tax return!

As for the LLC, what you were told is incorrect. LLC's do not allow you to deduct any expenses or depreciation that you would not otherwise be entitled to. Including setting up an LLC taxed as a partnership. Having a rental property in a partnership would not change the overall deductibility of property expenses or depreciation, they would still be limited to the passive activity loss limitations (with the special allowance $25,000 mentioned above being a potential exception based on your MAGI).

I hope this is helpful! Happy to answer any additional questions.

 Thank you very much Katie (and everyone else that responded in this thread). I will be asking for written clarification because it sounds like I was either given wrong advice or (more likely) misunderstood the advice given.

Really appreciate the help.

Quote from @Jonathan Bock:

@David Cherkowsky

How do you hold title currently?  I'm trying to understand why this structure is being recommended.  

Title is solely under my name. Financing is with a conventional loan also only under my name.

I was told if I was filing jointly, the limit to where I can write-off expenses and depreciation is somewhere around $170k, but because I am filing as single, I am greatly limited.

She recommended a partnership LLC where I will own the property 100% within the LLC, but I need a partner to own at least 1% of the LLC.

Quote from @Jonathan Bock:

Quote from @David Cherkowsky:

I purchased a rental property earlier this year, and it will be my first year not taking the standard deduction. I met with a tax professional I found through BP, and in our planning call, she mentioned that if you are filing single, and make over ~$80k, then you cannot write-off any expenses associated with a rental property, or depreciate the property. The only tax benefits would be taxes and interest. 

She said to be able to use depreciation and write-off expenses, I would need to create a partnership LLC and have someone else be at least a 1% owner in the LLC.

I've read a few books on real estate tax planning now, but recognize there is a lot that I don't know. I'm mostly looking for a sanity check that this is required.

Thanks in advance for the responses..

 I'm so confused right now please elaborate 

 Hi Jonathan. This is the information I have. What are you looking for elaboration on?

Quote from @Kevin Sobilo:

Quote from @Dan Thomas:

Yes, my cpa told me the same thing about depreciation. At the end of the day (from what I understand) it is a wash anyway. When you sell the property, if you depreciate it, you pay the recapture. Does your tax professional suggest you create this LLC and have a 1% owner? Seems like this may be finding a way to force the depreciation issue....is there value in doing that? It doesn't appear so to the layman. I'm not well versed in the tax code by any means but this whole depreciation thing seems like something that applies to some people based on individual circumstance but the gurus preach it to the masses.

@David Cherkowsky, I'll just comment on the value of depreciation and leave the rest of it to a tax expert.

Yes, depreciation is generally meant to defer taxes but that can have a LOT of value and here is why:

1. Money today is worth MORE than money in the future. By not paying tax today, that money can be used by you productively to earn MORE money. Then if you do sell later and you pay the tax, you are paying it with "future dollars" which are worth LESS because of all the inflation that occurred in the interim.

2. You don't have to recapture the depreciation with a sale!

If you want to sell a property and keep deferring that tax by NOT recapturing the depreciation, you can do a 1031 exchange where the proceeds are held by a licensed intermediary for a short time while you identify and close on a replacement property. Basically you sell one investment and roll the money directly into the next investment.

This allows you to start taking depreciation all over from the beginning again and hopefully on a more expensive property with MORE depreciation.

3. You can ACCELERATE the depreciation!

By default depreciation is straight line taking a flat amount per year based on the expected life of what you are depreciating. For example 27.5 years for a residential property. However, you can choose to do a Cost Segregation Study and instead of depreciating the property as a whole you depreciate each piece of the property some of which have a shorter lifespan and that allows you LARGER deductions sooner!

4. Your heirs don't recapture that depreciation when you die!

When your heirs inherit your properties, they do so at the "stepped up basis" aka the value of the property when you died. So, nobody pays to recapture all that tax you deferred!

So, if you plan it well you can deffer those taxes and then stiff the tax man by dying before you finally cash-out and sell those properties. 

 Thanks Kevin! For these reasons, I am absolutely interested in depreciation.

Quote from @Dan Thomas:

Does your tax professional suggest you create this LLC and have a 1% owner? Seems like this may be finding a way to force the depreciation issue....is there value in doing that? It doesn't appear so to the layman. I'm not well versed in the tax code by any means but this whole depreciation thing seems like something that applies to some people based on individual circumstance but the gurus preach it to the masses.

Yes, she did. Depreciation I am less concerned with as I agree, based on what I understand, it's lowering taxes now, which will have to be paid later when the house is sold. From a time value of money perspective, I can see this as being valuable, but overall it does seem to be closer to a wash.

I am more interested in the LLC, so I can write off expenses. From what I took away from my conversation with her, without the LLC, I can not write-off any expenses related to the house.

I purchased a rental property earlier this year, and it will be my first year not taking the standard deduction. I met with a tax professional I found through BP, and in our planning call, she mentioned that if you are filing single, and make over ~$80k, then you cannot write-off any expenses associated with a rental property, or depreciate the property. The only tax benefits would be taxes and interest. 

She said to be able to use depreciation and write-off expenses, I would need to create a partnership LLC and have someone else be at least a 1% owner in the LLC.

I've read a few books on real estate tax planning now, but recognize there is a lot that I don't know. I'm mostly looking for a sanity check that this is required.

Thanks in advance for the responses...

I purchased a rental property in June with 20% down and financed with a conventional loan at 8.125%. Obviously, with rates dropping I am looking to refinance to reduce that rate. I have a loan estimate from a lender that increases the loan amount by ~$3500 which essentially cancels out the out of pocket expenses, and reduces my rate to 7.5%. This reduces my monthly payment by ~$100 a month.

Am I correct to think that I am essentially paying $3500 for this refinance? If it were zer0 dollars out of pocket without increasing the loan amount, it seems like a no brainer, but increasing the loan has me skeptical. I'm looking for thoughts from more experienced people than myself to make sure I'm thinking through this correctly.

Thanks in advance for the help.