All Forum Posts by: Jim Kennedy

Tangible personal property - things you can generally take out and not do major structural damage like cabinets, alliances and carpeting not glued down - will be taken over 5 years, your roof over 15 years. Theres more, but thats the view from 10,000 feet.

In addition if you fit thru certain hopes you might be able to take 100% depreciation on those items in the year placed in service. 

Jim Kennedy

@Dylan Baxter You appear to be going in the right direction as far as the partial exclusion of gain from sale of a primary residence under Internal Revenue Section 121 (pubs are informative but during my tenure with the Internal Revenue Service, I learned that pubs can be superseded by IRS code section language), but a little more information would be needed to comment further

Jim Kennedy

@Philip Hernandez Yes, there are other tax structures available, but there's not a one-size-fits-all answer. The best fit usually hinges on your own unique economic facts, circumstances and goals. Your follow up question is a good one, but I don't have an answer off the top of my head. Keep one eye on how much debt you're carrying since it can affect your ratios that lenders follow, or even your credit score.

Jim Kennedy 

@Philip Hernandez  Here's  an overview of what IRS Revenue Ruling 2002-22 specifies, followed by some pros and cons to consider as you move forward:

• 1. All owners must hold title as tenants in common under local law.
• 2. There can be no more than 35 co-owners.
• 3. The co-owners cannot file a partnership tax return.
• 4. The co-owners may enter into a co-ownership agreement that runs with the land.
• 5. The co-owners must retain their voting rights in a specific manner.
• 6. Each co-owner must have the right to transfer, partition, or encumber their interest in the TIC investment without agreement.
• 7. If the property is sold, any debt on the property must be satisfied before the proceeds can be split among the co-owners.
• 8. Each co-owner must share all proceeds from and costs for the property in proportion to their ownership stake in the property.
• 9. A co-owner may issue an option to purchase their interest in the property, provided that the price reflects the fair market value for the relinquished property.
• 10. The co-owners may enter into a management or brokerage agreement, but it must be renewable annually.
• 11. All leasing agreements must be bona fide leases for federal tax purposes.
• 12. The lender for any loan agreements may not be related to anyone involved with the property.
• 13. Any payments made to the sponsor for the 1031 exchange must reflect the fair market value of the services rendered.

There are some disadvantages

Shared risk means a shared reward - Sharing a portion of the risk for the investment means you're also required to share any rewards from it as well. The portion of any rent or sale proceeds that you receive from a TIC property will undoubtedly be smaller than what you would get if you were the sole investor. After all, you'll have to share it with the rest of your co-owners.

You have to vote on most major decisions. Having co-owners also takes away your right to make most unilateral decisions about the property. For the most part, IRS Revenue Ruling 2002-22 requires that a vote take place before moving forward with any major decisions. If you're not the type of person who does well with group decision-making, this may not be the best type of investment for you to enter into.

But heres the advantages:

Low minimum investments and flexible investment amounts Since multiple people are investing in the same asset, the minimum investment on a TIC property is usually lower than one might expect. Additionally, since a tenants in common ownership arrangement allows each person to maintain a different fractional interest in the property, the amount you can expect to invest may be flexible, depending on the size of your ownership stake.

Opens up the potential for diversification and safety Given that the barrier to investment is lower with a TIC property, that offers many investors the chance to diversify their portfolios and invest in multiple properties. This, in turn, makes each investment a little safer because it reduces the effect that experiencing a loss will have on your wallet. In addition, during tough financial times, multiple people are likely to have a greater pool of resources to draw upon than a single person. With that in mind, there is also less of a risk that you'll no longer be able to afford the investment property.

 Access to higher quality real estate. Again, since many people are pooling their money, the TIC investor often has access to higher-quality real estate than they would be able to afford on their own. This also opens up the opportunity to attract tenants with higher levels of income.

Ease of ownership Finally, the fact that the property has multiple owners means that there are multiple sets of hands to take care of the day-to-day operations of managing an investment property. While you will have to pull your weight, the amount of work you'll be expected to do will be much less than if you owned the property all on your own.

As you decide what you want to do, the biggest plus is the flexibility you have, as pointed out in a previous post. Usually the IRS is pretty stringent about what you can or cannot do, mostly because they want to rein in people who try to get over, but the reins are a little looser on 1031's and TIC's. Hope this helps.

Jim Kennedy

There's a good chance it wont make a difference to the IRS, because you're taking it from one pocket, putting it in the other, and both pockets are in the same shirt. Of course, it should be corrected, and that might be as simple as a journal entry.

Jim Kennedy

The seller has one job. Sell it. Its nice that there's an allegedly high occupancy rate, but how are you supposed to see if the cash flow services your debt and puts a little something in your pocket? I've owned 14 buildings in my investing career, and we asked and got a rent roll every time.  The old saying "Trust but verify" is especially valid in this fact pattern. Just my two cents.

Jim Kennedy

There are a number of qualified CPA's on BP. If you search the BP archives, there's a really good detailed post on questions to ask your potential next one.

Jim Kennedy

You won't be able to deduct it this year under the circumstances you presented. It will, however,  be incorporated into the property's cost basis. If you're renting the house, you'll be able to deduct it ratably over its life - residential or commercial. If you're flipping it, it will be part of the basis used in determining your gain or loss.

Hope that helps. Happy investing!

Jim Kennedy

@Allen L. The bulleted points didn't paste correctly. It was supposed to say  in contrast to .

• Independent contractor or employee.
• Generally, you must report payments to independent contractors on Form 1099-NEC in box 1

Independently it discuses the fact that a 1099 need not be sent to a S or C corporation or LLC electing to e treated as one. In short, the rules don't appear to be any different, just a new and exciting form to fill out!

Heres a good way to find it rather than scanning the whole IRS page: Hold down "Control" and "F", and  a dialogue box will open usually towards the upper right hand part of your screen.

Type in the four words Independent contractor or employee
It will show you 4 hits for that exact phrase, and you can clikcm the down key to find the one wea re discussing. Its the second of the 4 hits.

Hope that helps.

Jim Kennedy

Its a new form, with new rules. Here are some of the important points directly from the IRS website, but please follow the link to read everything about it. It starts about halfway down the page when you go there:

"File Form 1099-NEC, Nonemployee Compensation (NEC), for each person in the course of your business to whom you have paid the following during the year:

• At least $600 in:
• Services performed by someone who is not your employee (including parts and materials) (box 1);
• Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish (box 1); or
• Payments to an attorney (box 1). (See Payments to attorneys, later.)

Trade or business reporting only.

Report on Form 1099-NEC only when payments are made in the course of your trade or business. Personal payments are not reportable. You are engaged in a trade or business if you operate for gain or profit. However, nonprofit organizations are considered to be engaged in a trade or business and are subject to these reporting requirements.

Exceptions.

Some payments do not have to be reported on Form 1099-NEC, although they may be taxable to the recipient. Payments for which a Form 1099-NEC is not required include all of the following.

• Generally, payments to a corporation (including a limited liability company (LLC) that is treated as a C or S corporation)
• Independent contractor or employee.
• Generally, you must report payments to independent contractors on Form 1099-NEC in box 1"

Jim Kennedy