All Forum Posts by: Dylan Brown

One thing that is unique about S corporations that you will not find in partnerships is that you are required to file a tax return just through your existence.

unlike partnerships, which only require you to file a tax return if you show a profit or loss, I agree that you should technically file both 2024 and 2025.

I agree with everything being said here.

find a fantastic qualified intermediate who can explain the process to you well.

then find a fantastic CPA who understands the process well and will report it correctly for you.

It's one thing to do the transaction correctly.  Equally important is the follow-through so be wise with your CPA selection

Hey Mahender,

Great question—and you’re thinking about it the right way.

Since you’re a passive investor in the self-storage deal, those K-1 depreciation losses are considered passive under §469. And because stock gains (even short-term) are not passive income, you can’t use the real estate losses to offset them.

But—those losses aren’t gone. They’re just suspended and carried forward until you have other passive income to offset (e.g. rental profits from another deal). And when the syndication eventually sells the asset, any remaining passive losses from that activity are fully unlocked and can offset all types of income—capital gains, W-2, etc.

This is where working closely with your advisor can really pay off. There are ways to plan around timing—like realizing gains in years when you have passive income or triggering a disposition event—to make better use of those losses and improve your overall after-tax return.

Hope that helps clarify things.

The key here is to understand how depreciation can be utilized in your situation.  

in your position, you may benefit from doing cost segregation studies on your properties which can increase the depreciation expense enough to potentially offset your rental income.

investors who pay no taxes on their real estate earnings all do so through taking advantage of opportunities to maximize or accelerate depreciation.

if you end up generating a tax loss by using depreciation, you can also carry forward any additional losses you are not able to use into future years when you might to show gains.

My suggestion is you start by finding a good advisor who can walk you through how to understand depreciation of fixed assets and what levers you can pull to maximize your depreciation.

if you are doing real estate full time, I also suggest that you look into REPS and sec. 469.

@Denise B. Got it. 

The costs incurred would not be deductible - instead they would be recorded to the basis of the land.

Because you are subdividing into two parcels, you would need to take the original basis of the land (what you paid originally) and divide it in two parts based on the land area. For example, if you purchased the lot with buildings already on it for 500k and according to tax records the land value in the year of acquisition was 20% of the assessed value, your basis in the land is 100k (the other 400k is the basis in the buildings).  If you were to split that into two equally sized lots, then the land basis would be 50k each.

Then you would also split the costs incurred to split the lot. So if you incurred 10k in costs, that would increase the basis from 50k to 55k each.

Then once you ultimately sold the property you would be able to use that basis in calculating your gain on the property for tax purposes.  The end result is that your gain will be 5k less per property when you go to sell because of the 10k of costs you incurred.

TLDR: you can't deduct the costs right when you incur them, but you will still get the tax benefits from incurring the costs when you ultimately sell each lot.

Hi @Raven Ye Mahar,

@Ryan Coon has provided some excellent points regarding the legal structure and potential asset protection strategies from an attorney's perspective. His insights on disregarded entities and member distributions are spot on.

As a CPA, I wanted to chime in primarily on the tax and operational accounting side, and offer a general word of caution against creating overly complex structures unless absolutely necessary. While I appreciate the detailed planning involved in the structure Ryan outlined, and I certainly can't speak fully to the legal protection side, it's worth noting that I work with numerous real estate investors and developers, some managing portfolios in the $100M-$500M AUM range, who often utilize less convoluted entity structures than the multi-layered parent/holding/C-corp management setup described. Complexity can sometimes introduce unforeseen operational friction and administrative costs.

Specifically regarding the management company entity choice:

C-Corp vs. S-Corp: Ryan mentioned using a C-corp for the management company, potentially for tax mitigation strategies like medical expense reimbursements. While this can be a valid strategy in specific circumstances, it's crucial to be aware of the potential for double taxation with a C-corp. The corporation pays income tax on its net profit (first layer of tax), and then if those profits are distributed to you as dividends, you pay tax again on those dividends at your individual rate (second layer of tax).

Often, for a management company primarily servicing related entities, an S-corp can be a more tax-advantaged choice if a corporate structure is desired. An S-corp is typically a pass-through entity; the net income or loss is "passed through" to the owner's personal tax return, avoiding the corporate-level income tax. While S-corps come with their own rules (like needing to pay reasonable compensation to owner-employees), they generally avoid the double taxation inherent in the C-corp structure for distributed profits.

On the accounting and operational side, particularly regarding the Series LLC and bank accounts:

QuickBooks with Class Tracking: Maintaining separate bank accounts for each property or Series LLC cell certainly helps demonstrate separation, but it can become administratively challenging very quickly. I highly recommend using a robust accounting system like QuickBooks Online. By upgrading to a version that includes "Class Tracking," you can achieve the necessary financial separation without needing dozens of bank accounts.

Trust Accounting Principles: With Class Tracking, you can run operations through fewer accounts (perhaps one for the management entity handling inflows/outflows and one main account for the holding entity). Every single transaction (rent income, expense payment) is tagged to a specific "Class," which you would set up for each property/Series cell. This effectively creates internal "trust accounting." You are holding funds that belong to specific properties (Classes) within a commingled bank account, but your accounting system provides crystal-clear, segregated reporting for each one. This method provides the distinct financial records needed to support the legal separation of the cells just as effectively as separate bank accounts, but far more efficiently. Virtually all high-level, large-volume property managers use this trust accounting methodology rather than juggling separate bank accounts for every single property.

Simpler Alternative Considerations:

Be mindful that overly complex structures aren't always necessary. For many investors, a structure involving:

A Holding LLC (like your Wyoming parent).

Separate single-member LLCs for each property (or each Series within a Series LLC), all owned by the Holding LLC and treated as disregarded entities (DREs) for tax purposes.

A Management LLC, which could also be a DRE owned by you or the Holding LLC.

This simpler structure often provides significant asset protection (isolating liability to the specific property LLC) and simplifies tax reporting (as all income/expense flows up to the Holding LLC and then potentially to your personal return if the Holding LLC is also disregarded or a partnership).

Unless your management company is intended to generate substantial profit on its own (e.g., managing properties for unrelated third parties and earning significant fees – perhaps >$150k annually), designating it as an S-corp or C-corp might be overkill. If it's primarily self-managing your portfolio, it might have very little taxable profit itself, potentially just charging enough of a management fee to the property-owning LLCs to cover its direct operating expenses (like software, admin costs, etc.).

Every situation is unique, but starting simpler and adding complexity only when clearly needed is often a sound approach.

Feel free to DM me if you'd like to discuss accounting setups or tax planning strategies in more detail!

I can only speak to this from a tax perspective, but I can assure you that entity structure is not linked to tax advantages in any way as it relates to your situation (with the only exception being the potential for certain retirement plans).

I have little to add to the above other than DO NOT PUT YOUR PROPERTIES IN AN S CORP.

That is one thing I see happen all the time when people get eager to create umbrella entities for legal reasons but this causes a huge tax headache.  When in doubt, you should always stop and DM a trusted CPA if someone is telling you to own real estate in an S corp either directly or indirectly through some form of umbrella ownership.

Happy to chat if you have questions!

@Silo Mansaray I see - you may consider looking first at a specialized CPA.  A tax attorney is a valuable resource, but they focus more on high-level structuring and litigation whereas a quality CPA can give you valuable advice for typically a lower hourly rate.

If you need the following, I would start with a CPA:

- Entity Structuring

- Proactive tax planning

- Tax compliance

- Tax deduction optimization

- Representation in an audit

- Ongoing Business Advisory

An attorney would be more focused on bigger issues like:

- Private Letter Rulings

- Representation in tax law disputes

- Representation in US Tax court

- Criminal Tax Investigations

- Legal Analysis of complex tax positions

DM me if you want to chat more about what a CPA can do for you.

I have had several clients do the same.  Are you trying to learn how to report these for tax purposes?  Just trying to clarify the question before I take a shot at answering.

@David Krulac I have a significant amount of experience in OZ structuring and often times it becomes more of a hassle unless you are doing large projects.

@Jason Zundel is totally on the mark with his run down of OZ benefits so I wont dive any deeper than that other than to comment that despite the deferral being for only about 2 years under current law, the biggest benefit that a lot of my clients are still going after is the permanent gain exclusion for future appreciation if you hold the asset for another 10 years.

The part that I wanted to dive into that a lot of investors are unaware of is the structure that is required to actually make a qualifying OZ investment.

For whatever reason, congress made it so that you need to acquire OZ property within a partnership structure or a corporate structure, not just in your own name via a SMLLC.  This means if you don’t have another partner, you typically would need to not only form a MMLLC, but you would also need to form an S corp to become a partner in your MMLLC so that you can effectively have a partnership.

That amounts to two different additional tax returns that you would need to file at a minimum just to have a qualifying entity structure to become able to make an OZ investment (or only one if you have another partner willing to co-invest, eliminating the need for the S Corp).

Many people don’t realize that it is not the acquisition of the property that triggers the qualifying gain deferral, it is actually the mere contribution of cash into a qualifying entity structure that causes the deferral.  Then it is just up to the entity to use that cash to buy and improve qualifying property to avoid penalties.

The other overlooked requirement is the original use or substantial improvement test.  

This means that it is not enough to simply buy property in an OZ, but you have to either develop a building from the ground up or you need to take an existing building and at least spend as much renovating it as you spent acquiring it in the first place. 

I am happy to dive into this deeper if you would like - just reach out.