All Forum Posts by: Eric Williams

Quote from @Kevin Muns:

I am going to lend money to a family member to pay delinquent mortgage payments, and a few bills. He is going to list his home for sale in the next 10-14 days. The money from the sale will be used to pay me back with interest, as well as a portion of the proceeds. However, he has a history of drug use as well as medical issues that could cause him to pass any day. The family member ( property owner) and the beneficiary have agreed to sign any personal forms or contracts. What legal forms do I need to protect myself, to have an added layer of protection? 

Where do I get these forms? Lawyer, title, self create? 

There isn't a ton of juice in this deal, so any cost savings or strategies would be appreciated. 

 So what you want to do is create a bona fide loan under 166 in case it becomes a bad debt loss you can take as a short-term capital loss in the year it becomes worthless.

Depending on the amount you may want to make sure that you have evidence of attempt to enforce the obligation on lapse of payment.

You want things like:

Evidence of indebtedness (written or printed)

Interest rate consistent with risk-profile

Collateral

Payment Schedule

History of Payment

Enforcement efforts evidence on non payment

Ability to lend and repay

Consistent treatment across tax forms

Remove any evidence of there being payment subject to conditions. You want an unconditional obligation to pay a fixed or determinable sum in the future.

Also any related party transaction is subject to greater scrutiny due to there being a potential lack of adverse interests, but instead possible collaboration the undermines arms-length principles.

Arms-length = economic adversaries.

I see a lot of questions about personal residence disposals and their tax treatment so I figured I would just post a quick summary.

I once read that there is no other asset class given greater preference by tax law than real estate.

Here is an example under 121.

If you sell a personal residence and meet the ownership and use tests, you can exclude up to 250,000, or 500,000 if married filing jointly. You must meet these tests within 5 years ending on the date of sale, not necessarily consecutively.

After two years, assuming all conditions are met, you can do it again.

Now it can of course get more complicated, for example with a divorce, or with the depreciation of the portion of the home office, but that's the general idea.

Honestly if I don't get a 1099-S and the total proceeds is under 500k, I don't even report it. 

BUT* Always give your 1099-S to your CPA. He has to tie that amount out to the 8949, and if it is not done so, the IRS will recalculate your taxes and not in your favor. So if you sold a home for 500,000, they will not subtract the basis from purchase, but will add 500k to your taxable income. I've seen it.

The IRS does not calculate in your favor.

Guys these are great tools if you don't like tax law and regs. Check out pubs and instructions.

Here's a good couple of Pubs:

https://www.irs.gov/forms-pubs/about-publication-523

https://www.irs.gov/forms-pubs/about-publication-527

Quote from @Kim Coffman:

If we sell our primary home, which we have owned for over 20, years, would it be subject to capital gains tax if we owner finance?

 Under 121 you are allowed a 500,000 exclusion for sales of personal residence that meet the ownership and use test.

If you get a 1099-S you need to report the amount on the 8949, Long-Term Box C. Make sure to properly calculate the gain, even if excluded.

Quote from @Taylor R Herschleb:

My wife and I are looking to potentially by a new primary residence and turning our current primary residence into an investment property. If we do this, would we be able to take advantage of the tax benefits of investment property which would've been purchased directly as an investment, like depreciation? If so, could we obtain all 27.5 years of depreciation?

This is a personal to business conversion.

When a personal residence is converted to business use (or for use in the production of income), its starting point for basis for depreciation is the lower of (1) the adjusted basis on the date of conversion, or (2) the property’s fair market value (FMV) at the time of conversion (Regs. Sec. 1.168(i)-4(b)).
Link:https://www.thetaxadviser.com/issues/2008/jul/convertingares...

The property would be 27.5 under 168 since it is residential rental property (nonresidential real property is 39).

Keep in mind depreciation begins when an asset is placed in service, which is when it is ready and available for its intended function, regs of 48.

So you would begin depreciation when it is ready to be rented out, evidence by you actually holding it out for rent (advertising, etc).

Also you remember to allocate the amount between land and building, land is non-depreciable.

Quote from @Jared Kouba:

My wife and I are looking to move into a new home.  We are considering selling an investment property and converting our exisiting primary home into a rental.  We would need to use the proceeds from the rental sale to make a sizable down payment on our new home.  Is there a legal way for my LCC to purchase our current primary home utilizing 1031 exchange to avoid depreciation recapture and long term captial gains.  We still have a mortgage on our primary home, so I could see this getting messy, even if it is possible.  

Why not sell your personal residence under 121 and exclude 500,000 of gain (up to).

Use the proceeds to buy the new home. Wait two years, meet 121 again, and you can do it again.

 Selling the investment property will be subject to taxes and you'll have less to work with.

Also moving out of a personal residence and turning into a rental property has backfired in certain cases. People like to sometimes move and leave a residence when they go back instead of sell it, take rental deductions, but make no effort to rent it out, or show evidence it hasn't been fully converted sometimes by using it here and there for personal purposes. 

Also if the LLC is a single-member LLC, it's disregarded at the Federal level, so it would be like you selling it to yourself, which isn't allowed.

Quote from @Boaz Shor:

I'm currently house hacking my primary residence SFH by adding an ADU.

I saw that I can get depreciation on the ADU cost and even do cost segregation.

My question is regarding what happens during the sale.

I know about depreciation recapture, usually with a regular rental property I can 1031 to defer the taxes and recapture, but 1031 is not an option for primary residence (as far as I know).

Are there any other options to defer paying taxes when house hacking your primary residence ?

 I mean if you dispose of your personal residence and it meets the requirements of 121 you can exclude 250,000 of the gain, 500,000 if married filing jointly.

Quote from @Jose Sanchez:

I live in Long Beach, California.

I just purchased a single-family home that also has an accessory dwelling unit. I am living in the accessory dwelling unit  portion of the home and renting out the single family home portion.

Am I allowed to depreciate the single-family home since it is a rental property but the entire lot is zoned as one single-family home parcel ?

If I can depreciate it, can I do a cost segregation on it as well and bonus depreciate as well?

It’s difficult finding anything on this.

 You need to allocate the purchase price between the building and land first based on fair market value which you can find on your local tax assessor website.

You can only depreciate that portion that is being rented out, as depreciation is allowed in this case for property held for the production of income under 212.

You cannot bonus a house (at least not the structural component), ever.

Bonus is under 168(k) and is for property with class lives of 20 years or less, and commercial or residential is 39 and 27.5 respectively. If you cost seg the 27.5 in to its shorter component you can bonus those, but they are no longer part of the house, and are more likely furniture and fixtures (personal property vs real property).

I want you to take a look at this article because cost segs are a lot more intensive than people think. I would not bonus a residential rental property. It is hardly ever done, like ever. It's not really that smart anyways because you're paying money for the study, taking the bonus, then watching it sit there because you have no rental income to use against the depreciation or it's being suspended as a passive loss. You have to recapture that depreciation anyways under 1250 later on disposal, or 1245 if you bonus also.

You are so much better off keeping your CPA aware of your plans. Don't be the client that disposes a rental property, get his with bracket creep and more taxes, then tells the CPA, "I didn't know that was going to happen." Well neither did I...

Talk to him ahead of time - maybe you have some capital losses from brokerage accounts you can harvest in the year of disposal, or do an installment sale, or divide the land and residence and sell them in separate years, or 1031, or group, or move into and take 121 to exclude the gain on disposal after you did the same thing for your personal residence.

https://www.irs.gov/individuals/international-taxpayers/help...

Quote from @Abhimanyu Aditya:

I am a US citizen. My parent is an Indian citizen. She has some money she wants to invest in the US in a real estate condos we can rent out.

She is happy to have everything go through me, i.e. she transfers the money to me, then I buy the property and earn the rental income. The only request she has is that she wants to be on the title or in the LLC or part/full owner of the holding structure. This is mostly so she "feels" secure.

Ideally, I want to setup a structure where I can, from a tax and operational point of view, operate as would a US citizen solely investing for themselves and reap all of the advantages offered to us from this point of view. But, with this added requirement that somewhere my parent's name is there so they feel all right about it.

For example, if we were to establish an LLC where we are 50-50 partners but in the operating agreement we make it so that all profit distribution comes to me (as compensation for operating the properties for example). I believe this is possible. I assume under this scheme the standard tax deductions such as depreciation, deductions etc. would still apply.

To keep things simple, we can assume cash purchase (no mortgage necessary). To make things interesting, I am curious how I could apply for a DSCR loan against my credit rating and SSN but for the LLC.

 Worth reading.

https://www.irs.gov/individuals/international-taxpayers/help...

Quote from @Joshua Ellis:

My dad and I are going to be purchasing a rental property soon under the LLC which he owns. What would be the best way for him to distribute my income to me. I want to be legal and also take advantages of the tax benefits if able. I've heard of possibly having him pay me dividends which can be tax deductible for him/ tax free income for me. Looking for ideas. Thanks!

The income distributed to you if you are a partner of that LLC is governed by the partnership agreement, and where there is none, state law. What did the LLC elect to be taxed as? Only C Corporations have dividends I believe under 301 and 316. Partnerships and S Corporations have distributions.

LLC's have members, corporations have shareholders, partnerships have partners.

Quote from @Emily Senior:

Hi! My dad and I are looking to get into real estate investing together and are wondering what we need to do before we get started? Mostly we are trying to make sure we don't have to pay a lot of extra taxes that could be avoided if we set everything up correctly to begin with.

Is real estate income (from long term rentals) different than self-employment income? Do we need to set up an LLC and Scorp to do a W2 type salary? We'll talk to an accountant before starting anything, but just currently looking to figure out what direction to go in.

Thanks!

 Real estate income is different from self-emplyment income because self-employment income is subject to self employment taxes, among other things.

What are you planning on doing?

Liabilities are a lot easier to include as basis for partnerships than S Corporations. 

You won't likely have self-employment income if you are employed by the S Corporation.

Now if you are a general partner of a partnership, you will have self-employment income under 1401 or 1402 I forget.

I definitely would talk to an attorney or CPA closer to your activities before setting up an S Corporation for holding real estate. Partnership and real estate go hand in hand. S Corporations are more often used for professional services over investment vehicles.