All Forum Posts by: Holly Chan

@Andrey Y. To add on to what others have said, you should find a CPA who is willing to take the time to explain these things to you in a way that makes sense. This is YOUR tax return and YOUR finances, so you should understand them (at least to an extent). Yes, CPAs are human and make mistakes (many just rely on tax prep software to spit out an answer), but a good CPA will look for tax-saving opportunities and communicate with you on why/how to implement them.

Good on you for not accepting and paying something that didn't make sense, and for asking about it.

1. Tracing the debt proceeds is time sensitive so the deductibility of the interest expense will depend on what you use the proceeds for after you receive them. If the rentals and loan are in an entity, there is an optional tracing rule which would allow for the proceeds to be allocated toward Rental-A. This all needs to happen within the same calendar year.

2. If any of the 401(k) loan proceeds are in any way linked to the elective contributions, the interest is not deductible. Borrowing against a plan which is secured by any elective contributions at all will result in non-deductible interest. In other words, you can't pick and choose which funds you're borrowing against - they're all part of the same plan.

There are a lot of considerations here so it's not feasible to offer a particular income bracket or threshold where this would be beneficial. You should consult with your CPA - when you do, consider the following topics - 

• SE income vs. a salary
• Qualified Business Income Deduction
• types of retirement plans and various limitations (SEP IRA, 401(k), Roth IRA, etc)
• how the property management company will be treated for tax purposes (partnership, S corporation, single-member LLC, etc)
• passive vs non-passive income/losses (are there passive losses which could be limited by converting some of the passive income to active?)

@Chase Lowry, diversification is an important strategy for many people and retirement plans offer significant tax and other benefits which real estate investing cannot always provide.

To answer your question, I'm going to assume that the work requiring your new vehicle is done within your individual corporation, and that the corporation would be purchasing the vehicle regardless of the flip, i.e. there is a business purpose for the purchase which will continue when the flip is completed.

To make this work, the corporation should purchase/lease the vehicle in the same year the flip is sold. The full lease value becomes an asset which is eligible for 100% bonus depreciation (assuming the vehicle is used 100% for business purposes). There are limits to bonus depreciation on passenger vehicles which a 6,000+ lb vehicle is not subject to. It's an eligible asset for Section 179 expense, as well, but Section 179 expense has other limitations including property cost and taxable income limitations. You'll likely get a better result taking bonus depreciation. By recognizing the full value of the lease, you do not then expense the lease payments as they're made. Instead, you book the asset and a liability and then reduce the liability each time a lease payment is made.

The gain on the flip will come through as either short-term capital gain or ordinary income, depending on how regular, continuous, etc the flipping activity is. If it's ordinary, the depreciation on the vehicle will directly offset the income. If short-term capital gain, the rates are the same but it will be reported differently.

There are other considerations in your overall situation, including SE taxes, classification of the income streams, passive vs. non-passive and use of a corporation to name a few. Definitely engage a CPA to make sure you're getting the best tax result.

Deductibility of the interest expense in option 1 or 3 will depend on what you use the funds for. If you invest them into another property (such as fixing up rental-B or buying rental-C), it will be deductible for that property. If you use it for any personal expenses it will not be deductible.

Interest on a loan from a 401k plan which is secured by elective contributions is never deductible. If it's secured by a residence or other asset completely separate from elective contributions, it might be deductible depending what the funds are used for.

Corporations are generally not well suited for rentals from a tax perspective. Putting them into an LLC might change the deductibility of the interest but it still depends on how much of the proceeds are used within the LLC versus distributed out. If enough is distributed out of the LLC, deductibility will still depend on what the funds were then used for (personal interest is not deductible). The key difference with it being within an LLC is timing on tracing the use of funds, which could make it easier to get deductible interest. You should definitely consult with your CPA if this is the direction you're considering.

Absolutely agree with everyone above. One thing to add - don't issue a W-2 or pay yourself wages. You'll only end up paying payroll taxes which are unnecessary. Rental income is just that and will flow through onto your return as such.

Are you doing other property management or earning other ordinary (not rental) income through the business? If so, that may be why the suggestion came up. This type of income could be considered self-employment income, in which case moving it to an LLC which pays you a reasonable salary could reduce payroll/SE tax. There are lots of other considerations here, too, so definitely consult with a CPA who's well-versed in choice of entity and real estate.

I disagree that an amended return is required to be filed. As long as the losses were factually suspended and your income was correct, the Form 8582 is just a computational form. So while, yes, it should have been included with the return, an administrative error does not mean you lose the suspended loss carryover. You'll need to make sure you have the records to back up the carryover in case they ask.

@Trevor Dominique still just the $3,000. It only offsets other capital gains and not ordinary/rental income. So you'd have $10,000 of rental income and $3,000 of capital loss.

No change - the real estate professional rules apply to rental income/loss, not capital gain/loss.

Ashish is referring to the annual max of $3,000 net capital loss which can be taken in a given year, assuming there are no other capital gains which the loss can offset. Any disallowed losses (the $47k) get carried forward to future years and can offset future capital gains or continue to be taken $3,000 a year, if there are no other capital gains to offset. For example -

Year 1 - $50k capital loss, no other capital gains/losses = $3k capital loss taken on return, $47k carried over to future year.

Year 2- $50k capital gain, no other capital gains/losses - the $47k capital loss carry over from Year 1 reduces the capital gain to $3k to be taken on your tax return.

Alternative Year 2 - no capital gains/losses - $3k capital loss taken on return, reduces the capital loss carryover to $43k to continue carrying over to future year.