All Forum Posts by: John Malone

@Phillip Wright you’ll want to first understand if this will be a Stock Sale or Asset Sale. As a seller, you normally want stock while buyer wants assets. This will ultimately determine the type of gain flowing through (ordinary/capital or a mix)

@Phillip Wright what type of entity? How many shareholders?

@Russell Brazil yes a few court cases on Pilots (one was a boat pilot) who had odd schedules

@Joseph Palmiero this one was over a $20k loss so rather surprising it ended up in Tax Court!

Quote from @Kyle Swengel:

Hello BP,

I have a fourplex in Tucson that I bought a couple years ago now. I’ve been renovating it and am almost done.

I asked my CPA about bonus depreciation and doing a Cost Seg study on the property so I could get the 80% bonus depreciation but this is what she said:

“Note that I don’t do that kind of work because it requires engineering knowledge that I don’t have. Also, I am not sure it’s worth the costs since you have small homes: the studies are usually reserved for large buildings with multiple units. Depreciation sounds good but it’s reversed when the building is sold so the benefits are probably minor at best. Note that the best tax advantage is expensing the repairs when possible rather than capitalizing and depreciating them.”

I bought my property for $400K and it’s worth close to $600K now. Am I going about this wrong? I thought that taking bonus depreciation was a no brainer? And most people I talk to say I should do it. What am I not considering and why is my CPA not wanting to go for it? Is my building really not expensive or big enough to where it makes sense?

Any help would be great. Thanks!

Are they experienced in real estate?  The answer seems very broad vs specific to your circumstances. 

A recent tax court case shows why the IRS is so successful in winning REP cases against taxpayers.  The case Gregory F. Teague et al. v. Commissioner was pretty easy for the IRS to win.  Honestly, quite surprised this was appealed all the way to TC.

https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/deduction-for-real-estate-losses-is-subject-to-phaseout/7gkbp?highlight=*

Facts:

- Husband worked as a remote salesperson for Comcast.  This was a fulltime job, though he argued he had a lot of "flexibility".  

- Spouse did not work full time

- Two rental properties, one in NH and one in Maine in which they bought to renovate

Outcome:

- Taxpayers forgot to group the activities as one for material participation, although this still would not have helped them most likely.  It is unclear if this was a DIY tax return or a professional failed to make the Election. 

- Taxpayers kept 0 time logs but were able to show they traveled to renovate the properties quite frequently.  He said he was able to multitask his Comcast job w/ the real estate (tough argument). They only allowed 300 of the 1200 hours he claimed!  Ouch.

- Judge found they were not credible and there was no way that the husband worked 12 hour real estate business days during the days he spent at the properties.  Whether or not it was true, the judge did not buy it.  Thus - they did not spend >50% of all working hours on real estate and the loss was denied.

Lessons Learned:

- Contemporaneous time logs, although not 100% required by law, will help you with a TC judge

- Full time W2 EEs will not qualify in 99.9% of circumstances.  

- They failed to show that the spouse, who did not work, was involved which could have helped "Petitioners do not contend that Mrs. Teague separately qualifies as a real estate professional, and so we do not further consider time she spent in these activities."

- During audit and during the testimony, the taxpayer gave different fact patterns.  This ruined the credibility in the judge's eyes.  

These cases are really a dime a dozen but should be used as learning lessons for those looking to claim REPS status in a given year!

@Kai Sosceles yes you likely can if the structures are separate and you do not personally use the common areas. You still may need to allocate mortgage interest, taxes, common utilities etc

@Brooklyn McCarty self management also can unlock some lucrative tax strategies as well!

Quote from @Kash Johnson:

@John Malone

Is there a path to transfer/re-classify multiple properties from a single owner to that of the single owner plus his heirs that doesn't result in immediate tax implications? He's trying to keep the business entity running, under himself and the heirs, but not have the estate eaten up by inheritance taxes or having to probate 150+ properties.

Any suggestions on what terms and concepts to search for here on Bigger Pockets so I can research this in a more detailed manner?

Yes there certainly are methods.  However - there is a ton that goes into this analysis including the possibility of affecting a step up in basis at death, overall estate value & current estate plan (trusts, wills etc), future health care planning & laws around asset transfers etc.

Given the inherent complexity to this, I'd recommend reaching out to several estate planners w/ a focus in real estate.  There are a lot of considerations and much that can go wrong, so certainly a professional should help.

@Kash Johnson quick note - Never put this type of real estate into an S Corp!

Moving items from disregarded to a MMLLC or Corp tax structure could have tax consequences, yes