All Forum Posts by: Eric Williams

Quote from @Derek Whitener:

I have house hacked a few times now where we buy a foreclosure, renovate, then sell a house at the two year mark so taxes have not been an issue. We now want to flip a house on the side, outside of our primary residence. My wife and I both have 9 to 5 jobs and this is just a project and is in no way a business for us. We would only be flipping one house within a calendar year.

If we only flip one house, say in six months, within a calendar year, would I be able to file my gains as an "investor" and avoid the additional FICA taxes that come along with being classified as a "dealer"? I understand that I would be paying the income tax rates, but since this is not a business or job for us, and more along the lines of a hobby, I would like to avoid the additional 16ish% that comes along with the self-employment tax.

I have looked through many resources and can't seem to find a straight forward answer. Any help would be appreciated.

 Yeah it's not just the self-employment tax you need to worry about.

Going from investor to dealer means those properties are considered inventory and the gains on disposal are now ordinary instead of capital, possibly subject to higher marginal rates.

I found this:

https://www.therealestatecpa.com/knowledgebase/avoiding-the-...

Quote from @Brannon Hamby:

I am in final negotiations on acquiring a property that was inherited.  The property is in a good location, thus attaching $value to the purchase price, but there are years of deferred maintenance, and a full rehab is needed.   

I am looking to negotiate as much time as I can, however, the seller is reluctant to agree to owner financing.  Is there a benefit to the seller by spreading out the gains/ proceeds of the property ($275K) over two (2)  different tax years?

We are gathering that $275K is her number and we are currently asking for that purchase to be made in 4 payments, every 90 days, until paid in full July 2024.

 There may be. But keep in mind although he pays taxes later, he also receives money later and thus has an opportunity cost for all missed investments in the meantime. 

Quote from @Jesse Aaron:

My aunt is loaning me cash to buy a property. I have two years to pay her back. She's charging me 0% interest. My plan is to rent the property until I can refinance it through a bank with payments to her along the way of $200 a month and a balloon at the end when I refinance the property. Of course I can't get ahold of my cpa and my closing has already been pushed back once. I'm curious to know how the loan should be drawn up. And if/how much taxes she will owe since she isn't making money on this transaction. Only getting back what she's put in. Also what taxes fall on me other than property taxes. I'm in Ga. Likely searching for a new cpa. 

 How much is the loan for? There is a de minimis exception.

https://www.law.cornell.edu/uscode/text/26/7872

$10,000 de minimis exception for gift loans between individuals

(A)In general

In the case of any gift loan directly between individuals, this section shall not apply to any day on which the aggregate outstanding amount of loans between such individuals does not exceed $10,000.

Quote from @Ouafae Fathi:

I am realtor. We bought a house last year as a rental property. My spouse earns more than 150k. When filling tax return turbo Tax staff told him he can not deduct the losses ( expenses and depreciation) snice his income is above 150k. But he did not mentioned that I am realtor. I also manage the rental property. Can we still fill those losses and deprecation this year? or do we have to carry them to next year tax filling? Thanks.

 Carryover likely. 

That 150k was the active participation exception complete phase out amount. That means you have to pass the real estate professional exception and then the material participation test.

A real estate professional for Federal tax purposes is based on measurable efforts found in two tests, and not on state level designations or occupations.

Quote from @Michael Plaks:

Quote from @Eric Williams:

Quote from @Edward Adams:

Hi

i just changed the roof on one of my rental properties. it cost 18K and insurance paid for it and i only paid 1.5K for deductible. do i just depreciate the 1.5K on my tax return or 18K?

 No. You do not need to depreciate it.

This amount falls under the safe harbor methods of 1.263-1.

It is a frequent mistake to combine a casualty loss and repairing the damage into a single event and look at the net out of pocket cost.

They are, however, two distinct events, treated separately for tax purposes.

The basis of the new roof is $18,000, not $1,500. So de minimis does not apply here.

 He said insurance paid the 18k and he only paid 1.5k.

In order to take a deduction for tax purposes you must basically materially poorer. 

‘Before any deduction is allowable there must have occurred some transaction which when fully consummated left the taxpayer poorer in a material sense.’

https://www.robertsandholland.com/publication-page?itemid=39...

Quote from @Greg Scott:

The tax issue is insignificant, and if you are married filing jointly, it is a complete non-issue.

People always jump to LLCs, but in my opinion it is far more important to first focus on having proper insurance. Whether or not it makes sense to have an LLC depends on your personal risk profile and the riskiness of the type of investing you are doing. There are also implications for estate planning, so it is best to discuss these things with your attorney.

Not necessarily. A husband and wife can form a partnership. All that is required to form a partnership is a joint endeavor to profit and share therefrom. Nothing has to be filed.

If that's the case you now have a 1065 filing obligation.

However there is a qualified joint venture provision that lets you elect out of Subchapter K and report two schedule C's like two K's, but that would not apply since it would go on Sch E.

Texas is a community property state anyway. And for Federal tax you have constructive ownership under 267 or the single economic unit reporting that is the married filing joint return.

There are spouses who form partnerships but I would just put it on Schedule E. If a single member LLC it gets lumped together. If you form a partnership, you have two K-1's, which flow to the 1040, where they end up probably in the same spot.

Quote from @Rodney Woodruff:

The LLC did not purchase any properties but did incur expenses. Do I need to file the entity separately from my personal filing?

An LLC is a separate legal entity, but may be disregarded for Federal income tax purposes if you are the sole member. 

If you don't have another member (partner), you couldn't file a partnership passthrough because there aren't partners.

If you didn't complete an S election you can't file as an S Corporation pass through.

It probably goes on Sch E.

Quote from @Jason Riddle:

I have the following situation. I have two properties, each in their own LLC. If I have an expense that's only related to one property, say a utility bill, than I can expense it under that LLC. However, sometimes I have expenses that aren't related to either property. For example, paying a CPA to file taxes at the end of the year which involves both properties. Where should this transaction be reported? Can it just be expensed under one of the LLC accounts or should I have an entirely different account?

 I usually see spreadsheets allocating based on gross rents to total, which makes sense.

If you want me to be really honest if the amounts are not that large I would divide by the number of properties. I'm not suggesting the audit lottery, but there is a cost benefit to be done. What benefit is there in accuracy to the tune of 10 to 20 dollars.

The IRS can literally not afford to hunt down 100 bucks. They are very selective. It has to be "worth it." 

So I have a Masters in Accountancy a Master in Taxation and CPA. My last firm had a real estate agent who brought in clients with up to 40 properties. None of these people cost seg for residential. When I see costs segs they're for commercial.

• 1)They are overstating the savings. They are going to use the maximum marginal rate and full cost recovery period. The problem is you probably aren’t even making any money the first year unless you have a tenant lined up and paying.
• 2)Even if you have a paying tenant in the year of bonus, it’s a per se passive activity. That means you have to actually have enough passive income to absorb that depreciation amounts. If not, they are suspended.
• 3)If you have other passive income from other passive activities, you then would watch the depreciation deductions be used against passive income. That still means it hasn’t actually has an impact. It’s just netting to zero.
• 4)If you are eligible for active participation, then you might be able to use it against ordinary income. But even then there is a phase out after 100k.
• 5) If you have a W-2 job, to offset that with depreciation, you have to spend more hours on real estate than you do your full-time job, and prove it. That's like 80 hours a week. You still have another test under to establish that you are a real estate professional, and then you have to establish material participation, on a separate basis. As in each rental activity is treated separately unless you group them under an election.
• 6)Most people do not hold on to the residential rental property for 27.5 years. This means if you bonus, then dispose, you have depreciation recapture during the same year you have a massive gain for the sale. This means deductions earlier when you had no income are worth less than the income you recapture at higher marginal rates in the year of disposal.
  

You want to hear something really crazy? I know people who intentionally do not depreciate. It’s an actual strategy.

Why? Because if there is no depreciation, there is no recapture, meaning the entire gain is capital in the year of disposal.

But under the regs you HAVE TO account for depreciation allowed or allowable in the year of disposition, regardless if you took it earlier.

But still, why?

Because the gain from disposal leads to bracket creep and pushes me into higher income tax brackets. But that depreciation now comes into play. I’m taking it all now, which means less capital gain. The depreciation is being taken all at once in the same year as the recapture basically netting out. Basically the total gain minus recapture is my 1250 unrecaptured amount.

What is the IRS going to do they say? Go back and give me depreciation deductions and give me a refund?

You need a 3115 since a depreciation correction is an automatic adjustment.

My point is, clever CPAs know they might be better off not taking it at all.

One guy won a case by buying an old disposal pit with trenches. He allocated the purchase price to the trenches. As he filled them up (people paid him to store there trash in the ditches), he depreciated the pits. IRS challenges and loses. The allocation was reasonable.

He basically got to depreciate air. 

https://casetext.com/case/sexton-v-commr-of-internal-revenue

I'm not trying to be rude, but if you go to taxprotalk, which is for serious tax CPAs, see if they are fans of cost segs.

I mean you guys are taking bonus, but if I sat down with you, and took your tax return, could you actually prove to me the bonus depreciation deductions you paid to cost seg actually had an impact on your tax liability? I want you to go look and see if there is a form 8285. Those suspended loss amounts you might see? Guess what they are.

Quote from @David Paull:

Does anyone know a good real estate investment minded CPA/Tax attorney in the Minneapolis area? I know taxes can be done remotely but I'd really like to work with someone local. Thank you! 

 Here's my advice.

Recognize that the client only volunteers the information a CPA asks for.

Recognize your ignorance, do not assume, and pick up the phone and double-check.

I cannot tell you how many times people pay the hard way because they assumed and didn't double-check. 

Don't listen to your friends. They do not know tax law. And they won't be there to help you pay for the mistake.

A CPA wrote a book - "Call me before you do anything."

Honestly a proactive client with a mediocre CPA can do wonders.