All Forum Posts by: Eric Williams

You do not need to do any of those tests for short-term rentals.

They are one of six exceptions to the per se passive rules.

It's in the temp regs 

1.469-1T

Exceptions. For purposes of this paragraph (e)(3), an activity involving the use of tangible property is not a rental activity for a taxable year if for such taxable year—

(A) The average period of customer use for such property is seven days or less;

(B) The average period of customer use for such property is 30 days or less, and significant personal services (within the meaning of paragraph (e)(3)(iv) of this section) are provided by or on behalf of the owner of the property in connection with making the property available for use by customers;

(C) Extraordinary personal services (within the meaning of paragraph (e)(3)(v) of this section) are provided by or on behalf of the owner of the property in connection with making such property available for use by customers (without regard to the average period of customer use);

(D) The rental of such property is treated as incidental to a nonrental activity of the taxpayer under paragraph (e)(3)(vi) of this section;

(E) The taxpayer customarily makes the property available during defined business hours for nonexclusive use by various customers; or

(F) The provision of the property for use in an activity conducted by a partnership, S corporation, or joint venture in which the taxpayer owns an interest is not a rental activity under paragraph (e)(3)(vii) of this section.

It makes sense to want depreciation to offset ordinary income.

Here's the kicker:

You need to establish that you are real estate professional. Then you establish material participation.

There are two tests to a real estate professional, a key one being:

More than one-half of the personal services performed in trades or businesses by the taxpayer during the tax year are performed in real property trades or businesses in which the taxpayer materially participates Sec. 469(c)(7)(B):

What that means is if you have a W-2 job, then you have to spend more time on real estate than your regular job. That's more than 80 hours a week (possibly).

From an actual case:

"Other than petitioner's general testimony that he spent more time performing services for petitioners' rental real estate activity than he did for Georgia First, petitioners did not present any evidence (such as time logs) or estimates of the total time petitioner spent performing services for Georgia First from which we can determine with any degree of certainty how many hours he dedicated to Georgia First during the years in issue. Because petitioners have failed to establish how many hours petitioner spent performing services for Georgia First, petitioners have failed to establish that petitioner spent more time on petitioners' rental real estate activity during the years in issue than he did for Georgia First

That bold part is saying that he lost because even though he knew his W-2 hours, he still failed to prove he spent more hours on the real estate activity. 

Remember, the burden of proof is on the taxpayer (Welch v Helvering).

Quote from @Spencer Krautkramer:

I am wondering what happens if the expenses towards a rental property exceed the amount you get in rental income, what happens that that excess dollar amount? 

I am currently house hacking (living in one unit of a duplex I just purchased). I will be sticking quite a bit of money into the property this fall that I would like to write off when doing my 2023 taxes. I am realizing that since I just bought the place, I won't have much rental income for this year - therefore, the expenses would exceed the income. Am I able to apply those expenses toward my W2 income at all?

I'm wondering if I should push some of these projects off until 2024. Any advice is welcome.

 Remember depreciation begins when the asset is placed in service. Regs 48

Consider that despite having purchased it and made improvements, it may not actually be yet depreciable because it is not ready to be rented out.

If so, you may be able to better time the tenant's arrival with the beginning of the depreciation deductions.

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.

If under 2,500 you can deduct the amount.

Make sure you attach a de minimis safe harbor statement.

https://www.irs.gov/businesses/small-businesses-self-employe...

What is the de minimis safe harbor election?

Under the final tangibles regulations, you may elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property to the extent such amounts are deducted by you for financial accounting purposes or in keeping your books and records. If you have an applicable financial statement (AFS), you may use this safe harbor to deduct amounts paid for tangible property up to $5,000 per invoice or item (as substantiated by invoice). If you don't have an AFS, you may use the safe harbor to deduct amounts up to $2,500 ($500 prior to Jan. 1, 2016) per invoice or item (as substantiated by invoice).

These limitations are for purposes of determining whether particular expenses qualify under the safe harbor; they aren't intended as a ceiling on the amount you can deduct as business expenses under the IRC.

The de minimis safe harbor election does not include amounts paid for inventory and land. Additionally, it does not apply to rotable, temporary, and standby emergency spare parts that the taxpayer elects to capitalize and depreciate under § 1.162-3(d). It does not apply to rotable and temporary spare parts that the taxpayer accounts for under the optional method of accounting under § 1.162-3(e).

Neither the IRC nor prior regulations included a de minimis safe harbor exception to capitalization; you were required to determine whether each expenditure for tangible property, regardless of amount, was required to be capitalized. The de minimis safe harbor election eliminates the burden of determining whether every small-dollar expenditure for the acquisition or production of property is properly deductible or capitalizable.

Quote from @James Forbes:

I'm looking for a real estate CPA in the Houston area. Can anyone provide a recommendation?

Thanks!

 What are you looking to do I got a CPA Master in Accountancy and Master in Taxation.

Quote from @Julio Gonzalez:

When talking about cost segregation studies, a common confusion is the difference between reclassification and bonus depreciation and the role that each of them plays in terms of taxes. Let’s dive in.

Reclassification

During a cost segregation study, the real property is reclassified into new categories of personal property based on its useful life. This can have a very beneficial impact as personal property typically has a much shorter useful life for depreciation purposes than real property.

For example, if you are getting a cost segregation study performed on a car wash, there will most likely be assets that have been classified as part of the building but are able to be reclassified to real property and depreciation over a shorter useful life such as 5,7 or 15 years rather than 27.5 or 39 years. This significantly accelerates the depreciation schedule leading to larger deductions in the beginning years of the assets, reducing your taxable income and increasing your cash flow.

Bonus Depreciation

Another key part of a cost segregation study is bonus depreciation. The Tax Cuts and Jobs Act (TCJA) of 2017 allows businesses to write off 80% (in 2023) of the cost of qualifying property in the year that it is placed into service. This can lead to significant tax write-offs.

However, bonus depreciation is currently being phased out. The bonus depreciation is based upon the year the property is placed into service. Bonus depreciation is 100% for 2022, 80% for 2023, 60% for 2024, 40% for 2025, 20% for 2026 and is completely phased out in 2027. Regardless of the bonus depreciation phase out, it continues to be a favorable strategy that creates significant tax savings.

 Look I'm not disagreeing but it needs to be added the value of a deduction is not purely based on timing. Bonus depreciation is allowed on 212 property unlike 179 first year expensing. 

But don't forget if the activity meets the active conduct test of 179 I can take bonus and then 179 the remaining amount assuming other conditions are met.

The issue is that even if you take bonus, you need to make sure there's some income that it can offset, preferably income amounts at the highest marginal rate. 

But since rental activities are per se passive, not only might you need to all basis requirements (704(d), 465, 469) if a partnership for it to get to the 1040, but you are also going to need either enough income to absorb it to avoid passive limitations, or be lucky enough to benefit from the active participation of 469 up to 25k.

Also if you dispose of it soon after you have ordinary recapture under 1245. The problem is it's occurring in the year of disposal, potentially exposing the taxpayer to higher tax brackets from the disposal, which now include the ordinary recapture.

Again, not disagreeing.

Quote from @Alex U.:

IF a property has been purchased a couple of years ago, and a regular depreciation was taken for 1 yeaer, ( ie. 27.5 year depreciation), in year 2, can you do a cost segragation, and take the bonus depreciation in the 2nd year?

 Yes.

This is an automatic change in accounting method that requires a 3115 and an adjustment calculation under 481(a).

Simply put, I have a Master of Science in Accountancy and a Master of Taxation and a CPA.

Does anyone want to work something out? Knowledge for Ownership Interest.

Quote from @Jorge Esteban Vargas:

I created an LLC for all my real estate affairs. Lately, I've been thinking about purchasing a new investment property with a friend of mine. However, we had no time to properly create a Limited Partnership because we randomly found a potential property and our realtor sent an offer to the seller there's a chance the seller chooses our offer. Because at first I wanted to purchase the property by myself, my LLC was going to be in the title of the property by using a hard money loan. However, it now seems that I may need more money to and a friend of mine is willing to invest some money. Are we allowed to have my LLC be the "owner" property and then have a written statement stating that we'll split profit 50/50 and if we were to sell the property, proceeds would be split 50/50 as well.

Yes, that written statement is called an operating agreement and details allocation mechanisms. If not, default state rules apply.

You can usually do 50/50 by stating 50%/50%, or stating each owns units in the LLC that end up being 50/50.

I mean honestly it may be worth an attorney. The governance arrangement is sometimes more important than legal selection. If he dies now cousin Clem is your partner. You may want first right of purchase if he decides to bail for example. Who has decision authority? Etc.

Just a thought.

Quote from @Jim Rivell:

Hey everyone - I am going to be paying back a family member who lent private money on a deal recently. We did sign a loan agreement at the beginning of the loan and there is no early pre-payment in the contract. Do you typically fill out a "Loan Payoff Letter" signed by both parties? If so, is there one specifically that you typically use?

I'm going to tell you that it wouldn't really matter. I've never seen that term used in cases where loans between related parties were under dispute.

I would be more interested in demonstrating the interest was reasonable based market research, there is evidence of repayment, evidence of any collateral, consistent treatment as a loan on both tax forms, inclusion of interest income for him and interest deductions for you, there were provisions for enforcement of collection on nonpayment, amortization schedule, etc.

Remember, it is canon that substance takes precedence to form. A piece of paper doesn't mean anything if it is not consistent with the underlying transaction and applicable authority.