All Forum Posts by: Eric Williams

 Short-term rentals do not fall under the per se passive rules. They do not have real estate professional requirements.

You would still have material participation requirements. There are 7 ways but they all require a consistent, substantial, and considerate levels of activity.

Either way for passive rules keep in mind you cannot attribute the activities of others to your efforts. They do not count, and if anything, make you look worse since there is evidence you are doing less.

The more they do, the less you do. Also other factors would hurt like having a full-time job.

You can't pay yourself a salary on Sch C. You base contributions off self-employment income.

 Nope. Assignment of income doctrine prevents income shifting like this.

Whoever owns the property producing the income is taxed.

So a piece of property in terms of capital or ordinary treatment, relies heavily on the items intended use in the taxpayer's hand.

It can turn an otherwise capital gain into an ordinary one. It may even disallow previous amounts. And the IRS does do this.

Here are some factors from a case.

In determining whether the income should be classified as ordinary income or capital gain, the court evaluated nine criteria: 

(1) the taxpayer’s purpose in acquiring the property; 

(2) the purpose for which the property was subsequently held; 

(3) the taxpayer’s everyday business and the relationship of the income from the property to the taxpayer’s total income; 

(4) the frequency, continuity, and substantiality of sales of property; 

(5) the extent of developing and improving the property to increase sales revenue; 

(6) the extent to which the taxpayer used advertising, promotion, or other activities to increase sales;

(7) the use of a business office for the sale of property;

(8) the character and degree of supervision or control the taxpayer exercised over any representative selling the property; and 

(9) the time and effort the taxpayer habitually devoted to sales of property. It is important to note that, under Sec. 1221(a)(1), property is not a capital asset if it is “stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer . . . or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.”

It is key you be able to demonstrate both intent at the time of the transfer, and in activities after, especially if you churn. From the case:

During the trial, Mr. Flood argued that the lots were purchased for investment purposes and therefore the profits should be taxed as capital gains. However, the court found that even though the Floods did not develop the lots or use a business office, they put considerable effort into the real estate. The Floods examined public records to determine which property owners to contact to purchase the lots, mailed letters to the property owners to facilitate their purchase of the lots, prepared agreements for execution, prepared deeds, paid legal fees to clear title to properties they purchased, paid legal fees to ensure the closing of the properties, paid legal fees to enforce specific performance of purchase-and-sale agreements, conducted research, made phone calls, and used a real estate agent to sell lots. Additionally, Mr. Flood created a website designed to sell the lots and place advertisements in public places. The court also considered that the income the Floods derived from other sources was modest compared with the sale of the lots.

The court concluded that the “preponderance of credible evidence supports a conclusion that the Floods’ real-estate transactions were conducted in the ordinary course of a trade or business and not for investment purposes

Another thing I thought I would mention in regards to cost segs is they generally increase the amount of tangible personal property, which is really anything but real property and intangible property.

The definition of real property is defined in the regs of 48.

That section is repealed but it's still used and reference in the regs of 167.

1.48-1

For purposes of this section, the term “tangible personal property” means any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items which are structural components of such buildings or structures). Thus, buildings, swimming pools, paved parking areas, wharves and docks, bridges, and fences are not tangible personal property. Tangible personal property includes all property (other than structural components) which is contained in or attached to a building. Thus, such property as p machinery, printing presses, transportation and office equipment, refrigerators, grocery counters, testing equipment, display racks and shelves, and neon and other signs, which is contained in or attached to a building constitutes tangible personal property for purposes of the credit allowed by section

(e) Definition of building and structural components.

(1) Generally, buildings and structural components thereof do not qualify as section 38 property. See, however, section 48(a)(1)(E) and (g), and § 1.48–11 (relating to investment credit for qualified rehabilitated building). The term “building” generally means any structure or edifice enclosing a space within its walls, and usually covered by a roof, the purpose of which is, for example, to provide shelter or housing, or to provide working, office, parking, display, or sales space

I point that out because if you don't have a lot of personal property under 20 years how are you going to accelerate? Or if you do but it's not worth a lot. 

Consider actually waiting a couple year and see how things are going. If you have a solid level of income, you can always amend. 

 Absolutely untrue. You can simply go to the Cost Seg Audit Technique Guide.

As for tax law, yeah the standard is if you deduct anything on that return, you have the obligation to prove it if challenged. Deductions are a matter of legislative grace and the taxpayer bears the burden of proof, both of production and persuasion. Welch v Helvering

So if you put forth that you can deduct things faster under 162, 167, 168, etc., those are definitely standards you may be held to.

Also keep in mind you may pay for a benefit you don't actually accelerate because it gets suspended. Remember that you HAVE to take the depreciation, even if you don't benefit. So you may just end up delaying ordinary deductions and increasing ordinary income with recapture under 1245.

This also means you may get tax deductions at a rate lower for deductions when you have less income, and higher rates charged on recapture in the year of disposal. Also your capital gain is lowered the more you bonus.

If you are going to accelerate you need to really consider how much personal property there, how long you're going to hold it, any offsets available, alternative transaction structures like installment sales or even delaying it a year.

Publication 5653 (6-2022) (irs.gov)

It lists four more including the ones below.

The detailed engineering cost estimate approach (or detailed estimate approach) is similar
to the detailed cost approach. The difference is that the detailed estimate approach
estimates costs, rather than using actual costs. This approach is used when cost records
are not available such as for an acquisition of used property. I

The detailed engineering approach from actual cost records, also called the “detailed cost
approach” or “direct cost method”, uses cost information from contemporaneous
construction and accounting records. In general, it is the most methodical and accurate
approach, relying on solid documentation of the construction costs and minimal cost
estimating. Construction documentation, such as construction drawings, specifications,
contracts, job reports, change orders, payment requests, and vendor and supplier invoices,
are used to determine unit costs. The use of actual cost records in this approach
contributes to the overall accuracy of cost allocations, although issues may still arise as to
the proper classification of specific assets.

 The long-term rates have special rates.

Those passive losses are likely ordinary income but suspended. In effect, they derive from ordinary deductions.

You generally can't offset ordinary deductions against capital gains and you actually generally prefer not to.

 No you can't use your carried loss to deduct your capital gain and you don't want it to.

PAL losses freed up from a qualified disposition offset ordinary income which is better. So you have some PAL to offset some sort of ordinary income (W-2) or recapture in year of disposal.

It's in 469. 

I'm going to tell you that there is a partnership here by default. 301-7701

If you form an LLC with more than one member you are by default a general partnership.

Anytime there is a joint endeavor to make a profit and share, there is a partnership. You do not need an LLC to be a partnership. You can cite Luna as well but consider you might have additional Federal and state/local filings.

If it's with your wife then I don't think I would file one. You are a single economic unit on the 1040. 

I'm a CPA and I would recommend talking to your CPA before entering a transaction, just in case.