All Forum Posts by: Eric Williams

The real estate license does not mean a damn thing when it comes to Federal tax law and the characterization of the activity as passive or nonpassive.

The down payment is 100% not immediately deductible. It is capitalized and either recovered upon disposal if allocated to land, or recovered fully or partially via depreciation at 27.5 class life, straight-line, mid-month (presumably if residential rental or 39 if not). The down payment isn't a deduction during outflow because you didn't include it in income when received. You can't benefit twice.

I'm going to tell you I disagree and simply because you are managing itself does not necessarily mean it will be deducted against your W-2. Expenses and depreciation are likely going to be net against income from the activity that produced both. If the deductions are greater than income amounts and nonpassive, then I can see them offsetting ordinary income.

All rental activities are per se passive. There are more than a couple cases of real estate agents trying to use their accreditation as grounds for turning a passive activity into a nonpassive, and it never works.

Ask your CPA about the real estate professional requirements, and the about meeting material participation requirements.

I could be wrong but unless the rental is some exception to the per se rules, you might want to document if you want the benefits of a nonpassive activity.

https://www.thetaxadviser.com/issues/2017/mar/navigating-rea...

The LLC may be a pass-through entity. It can also be a single-member LLC (DRE=disregarded entity) reported on Sch C. It could also be a C Corporation, which I then turn into an S Corporation.

So itemized deductions or standard deduction are taken, not both. In fact by law the larger amount must be taken.

The business expenses first need to make it from the LLC to the 1040. It's likely passive though because rental activities are per se passive under 469 except for real estate professionals who meet the material participation requirements, or it is another exception available.

Those business expenses are probably lumped in with other amounts on box 2 of the K-1 as net rental income/loss.

I don't understand the pre-tax expense benefit, I would be more concerned with whether or not it even enters the income tax calculation or is suspended at the partnership level.

So I see a lot of questions about ways to lower taxes.

Remember, the objective is not to minimize your tax liability as much as it is to maximize the net present value of the transaction.

As someone once told me an interview that I did not get the job for, mouths get fed with cash.

Tax planning is really a legal structuring and restructuring of a transaction so as to maximize the net present value of said transaction.

Remember when I restructure the transaction I restructure cash flow.

But those cash flows and their values from a tax standpoint are often based on timing, character, taxpayers involved, and jurisdictions among other things such as risk profile.

When I adjust those factors I am adjusting the value of the transaction (expected future benefits), e.g., a deduction taken earlier at the maximum ordinary rate in a state with no income state is more valuable than a suspended long-term capital loss (oversimplified but not a terrible example).

 I agree, CPA two masters here. The NC return is correct as is in my opinion.

Remember that states often piggyback off Federal amounts, often AGI or taxable income (then make upward or downward adjustments for things like 179 or depletion).

Since the passive loss did not enter the taxable income calculation at the Federal level, it won't flow to the state return when NC piggybacks.

If you are a member of an LLC that elected to remain a partnership under check the box regs you are going to get a K-1. You partnership tax basis needs to be large enough to allow the depreciation deduction to begin with.

If there is insufficient basis deductions and losses are suspended at the partnership level.

If it does make it to the 1040 because you have enough basis for deductions and losses, it will flow to Sch E and then Schedule 1 and then page 1 of the 1040.

If will likely be included with other amounts and you won't see it specifically since it will be mixed with other income and deduction items in box 1 of the K-1.

Also without going into to much detail generally a deduction or loss has to go through three levels to be deducted at the individual level, tax basis, at-risk basis, and passive levels. 

So if the deduction does make it past the first level, it still may be suspended as a passive loss on the 8582.

So you capital contribution is 100k. 

If the property sells in 3 years at a gain of 100k, it will likely be a capital gain unless the partnership is a dealer.

Part of the gain calculation should be proceeds allocated to the land interest and be pure long-term capital.

The amount allocated to the building will consist of 1250 recapture and unrecaptured 1250 at 25%.

The depreciation is an ordinary deduction that would be lumped in box 1 of the K-1.

There may be 1231 and 1245 if they cost seged.

These amounts flow to your 1040 on Sch D and 4797 among others.

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No you cannot use the depreciation against the 100k profit because the depreciation is statutorily prescribed, and the accounting methods are an election made at the partnership level, not the partner level.

Also the gain is capital and the depreciation is ordinary. You don't want to offset capital gains with ordinary deductions since ordinary rates are higher generally. You want the ordinary deductions to offset ordinary income (more expensive than capital generally).

I'm a new member but I have a CPA and Masters in Accountancy and Master in Taxation.

I saw people posting about cost seg decisions and thought I would share some thing I had learned from others

1) The cost seg savings may be calculated at the highest marginal rate to maximize the potential benefit presented by the solicitor. If you are just starting you may not have income that creeps that high. Remember a deduction's value is partially based on the marginal rate.

2) Ask yourself how long you're going to hold the property. If you cost seg and bonus, then sell it two years later, you have ordinary recapture and much less potential capital gain.

3) You don't have to bonus all asset classes, be selective.

4) There is an assumption when you are presented the potential benefits by the vendor that you will hold it until the end of the class life, which could be 27.5 or 39 depending (possibly unlikely)

5) Even if you bonus it or 179 it (together potentially), the deductions might be so much greater than the income it gets suspended at the activity level. You didn't really accelerate anything and because of the time value of money every day that loss sits unused it becomes less valuable. 

6) I learned a strategy alternatively from farming. Taking straight line provided a hedge against the amortization (as the interest deduction decreases, income increases, but the depreciate hedges it somewhat)