All Forum Posts by: Dylan Brown

Jumping in here with some key clarifications on a few of the replies above. You all are fantastic and I love the energy - I want to just make sure all the info here is as useful as possible.

1. I am not positive about the exact statistics, but I do see individual investors using 1031x all the time. Just be mindful that the economics of a 1031 break down a bit with the smaller properties since the fixed costs of doing a 1031 are somewhat high.  It's a couple grand for the qualified intermediary to facilitate the transaction and it usually adds 500-1,000 to the cost of your tax return.  Many people simply opt out and instead maximize their depreciation on the newly acquired property to offset the gain from the sold property instead.

2. It is true that depreciation is just a deferral of taxes.  However keep in mind that often the recapture of depreciation (I.e. the repayment of the loan) is often at a lower tax rate than the tax rate on the income it initially helped shield - therefore beyond just the time value of money, it does result in real tax savings.

3. Cost segregation studies allow you to take a building that you would normally need to depreciate over 27.5 years (or 39 years if it is a commercial property) and selectively convert  percentage of the purchase price over 5 or 15 years instead. There is also an opportunity for some of that reclassified property in the 5/15 year buckets to receive bonus depreciation as well.  Recently, I saw a building purchase of 3M with only 1M of equity that yielded a total depreciation amount of $530k after the cost segregation study was applied (which amounts to a first-year deduction of 53% of the invested equity to the owners).

4. "Cash Flow" is not taxable. Cash flow does not actually factor into your taxable income calculation at all. What matters is the net profit and loss is for your property. Common ways where cash flow and net profit and loss differ: (1) principal payments on loan reduce cash flow but not net profit, (2) depreciation expense reduces net profit but not cash flow, (3) capex may reduce cash flow but not net profit, (4) depreciation recapture may increase net profit but not cash flow.  There are more examples of this but those are the main ones. This is why having a solid set of books that are reconciled monthly or quarterly are essential.

5. Real estate professional status does not alter the amount of deductions you are able to take. The only thing it alters is what other sources of income those deductions are available to offset. If you are not a real estate professional for tax purposes, your still able to take all the same deductions, your deduction may just not have anything to offset. In that case, they are not lost, they just carry forward to either a year where you can use them or they are freed up to offset any type of income if you sell or otherwise dispose of the investment that generated the losses. This is the part that is most commonly missed by DIY tax return filers - you desperately need a CPA if this applies to you and you are attempting to file your own taxes. I saw this cost a lady 67k in taxes one time - her reasoning was she wanted to use TurboTax to save ~$700 on her tax return... you can do the math on that.

6. Though I agree that de minimus and SHST are both great examples of ways to expense costs that may otherwise be capitalized, it is very risky to take an "all expense" approach to capex spending. You ultimately need to find a CPA that understands the finalized repair regs from 2014 and knows how to apply the betterment/restoration/adaptation of an economic unit of property test to maximize your repair expense and avoid capitalizing assets in a way that is supportable under the scrutiny of an audit.

7. TurboTax is the most sure fire way to miss deductions or mid-report income.  Admittedly, one of my guilty pleasures is reviewing a prior return of a RE investor who used TurboTax to file and noting all the mistakes.  I have done this about 2 dozen times and in all those reviews I have only found one return where all the real estate investing activity was reported correctly, and they had to contact TurboTax to override the software functionality to report it the way it was reported. Ironically, they also used a CPA in a consulting capacity to make sure they were filing correctly using TurboTax - at that point I feel like they should have just had the CPA do the return!

That is all for now - DM me if you want to ask more specific questions about any of the above!

This could be structured as a contract for deed instead of a master lease.  

If you are liquid enough, you could always use 60k as the down payment on the contract for deed and then just finance the rest.  If you do not have the 60k lying around, you could potentially finance the 60k down payment on the contract for deed, though I would want a lender to pop into the thread and weigh in if that is something a lender would typically go for (my guess is maybe not).

If those two are not an option, why doesn't the seller just take out a mortgage against the home and then move forward with the contract for deed or master lease? That way they get their 60k, but you can still either lease or enter the CFD.

If all else fails and they are very desperate to get the cash, there is always the option to offer them significantly less than you are currently offering and then you can almost certainly find an investor willing to front the cash if the purchase price is far enough below the FMV or ARV.

Curious to hear others’ thoughts!

Welcome!

In college I did house hacking - it was fantastic!

I would offer my assistance but I am a gopher and I have not verified that you aren't a badger fan yet... :)

One follow up to my post regarding depreciation.  Here is an amazing write up for you to read:
https://www.biggerpockets.com/forums/51/topics/1121063-expla...

Great post @Marcus Auerbach - I second it!

I will also add that often times the same person/team can be capable of all three (accounting, tax filing, and tax advisory) - however that doesn't mean that if you have them do your tax return they will automatically do the other two.

I can't tell you how many times I have been someone's tax preparer  and they were surprised to find out that the actual planning and year-round support is a separate engagement.

Not everyone needs all three right off the bat - but you should strive to have a working understanding of all three as soon as possible.

This is right in my wheelhouse — feel free to reach out if you want to talk through any of this more deeply.

Since you mentioned you're selling a 4-unit in Oakland, I’ll point out something that often gets overlooked: California doesn’t fully conform to the federal §1031 exchange rules, especially when it comes to exchanging CA property for out-of-state property, like a Delaware Statutory Trust (DST).

Here’s what’s important to know:

Even if you do a valid federal 1031 exchange into a DST (or any out-of-state property), California will track the deferred gain tied to your Oakland property and preserve its right to tax that gain later — even if you're no longer a CA resident when the replacement property is sold.

To enforce this, CA requires you to file Form 3840 annually until the replacement property is eventually sold or otherwise triggers gain. If that gain is never reported (i.e., you stop filing 3840s), CA may assume the gain has been realized and assess tax and penalties.

Other things to keep in mind:

• DSTs are fully passive and qualify for 1031, but you give up control. QOFs let you defer only the gain (not full proceeds) and offer long-term tax-free growth, but they don’t work for every situation.

• The gain from your Oakland property will be California-sourced income, so CA gets first dibs on taxing it. Since you're a NY resident, you'll also report it to NY — but NY should give you a credit for CA taxes paid (via Form IT-112-R). Still, there’s always some planning involved to avoid timing mismatches or double taxation.

• A 1031 into a DST can work well for generational planning — especially since DST shares are easily inherited and get a step-up in basis. But in some cases, it may actually make sense to recognize gain now and invest more flexibly if you're thinking long-term wealth transfer.

Let me know if you want to model some scenarios out — I love this stuff and am always happy to help behind the scenes.

Welcome!

I am new here as well but have been in the real estate space for about the last 5-6 years.

It is super rewarding to be a real estate CPA since I happen to be in the industry that can provide the biggest tax benefits of any industry. 

Couple accounting/tax tips getting started:

1. before you close on your first property, make a game plan for how you will track income and expenses.  Lots of people start out with just a spreadsheet - that is OKAY but I am a huge proponent of just starting out with a very light weight accounting system - now days there are tons of freemium software out there to choose from (like Wave).

2. Learn about depreciation - this is your best friend in real estate investing when it comes to tax.  There are tons of threads you can find on BP about it.

3. When it comes to tax time, get a CPA.  TurboTax or other DIY options end up hurting you in the long run.

And of course, slow and steady wins the race.  Many people get started and try top build to quickly and compare themselves to others, but you are in a great market so just take things one step at a time and start with bite-sized chucks.  You will do great!

@Darryl Givens

From an accounting standpoint, Buildium has the fewest limitations among the entry-level platforms. It’s not perfect, but it’s the only one I’ve seen that’s actively improving on the accounting side. From a property management perspective, I’ve consistently heard great feedback from clients using it.

One feature I like is the correspondence tracking—it allows investors or tenants to message you directly through the platform. Tenants can also access it from their mobile device, which makes communication much more streamlined.

As for your phone system, I always recommend Twilio. It’s the most robust and cost-effective solution I’ve found for building a professional system that still runs through your personal device.

I have mine set up so that:

• Clients call my business number

• A quick 5-second spam screening runs

• The call is forwarded to my personal cell (but they never see my number)

I can also make outbound calls using the business number, so my personal number stays private. You can even create auto-attendant menus to route calls (e.g. send tenants to the portal) and set up custom SMS automations if you want to reduce your inbound call volume.

Let me know if you want help getting started with either one—I’ve tested quite a few of these setups.

Very true!

My favorite category is car washes - the entire structure is bonus eligible because there is a special carveout in Pub 946 in asset class 57.1 that deems them as land improvements!

I had a double take the first time I read that one.

That is fantastic!