All Forum Posts by: Karolis Matulis

Publication 523

The personal residence exemption has a number of tests. The first test disqualifies any property from the exclusion of gain if the property was acquired in a 1031 exchange and disposed of in less than 5 years. Once you cross the 5 year mark the first test becomes irrelevant. 

So yes, theoretically you can move in 2-3 years after the exchange and satisfy the residence test to become eligible for personal residence exclusion after the 5 year mark. 

As Dave mentioned the big question is intent. As long as you don't have the moving van backed up in the driveway and actually rent the property for a while before making it a personal residence you should be okay. 

You would also run into the limitation of being unable to sell it for 5 years. 1031 property automatically disqualifies the personal residence exemption for that 5 year period. 

That is a very loaded question. As a general rule, no you cannot deduct rental/passive losses against ordinary income. There are exceptions such as real estate professional status and a special 25k deduction allowance based on income. 

The other option is converting rental income/loss into ordinary income/loss but the conversion process is only easy in converting income and not deductions.  

LLCs generally do not qualify as like-kind assets. You could do a reverse 1031 exchange. 

In essence you contract the intermediary to purchase the property on your behalf. They will hold title until you sell your original property through the intermediary, thus completing an exchange. One of the exchange intermediaries here can give you more detail. 

Feel free to shoot me a PM. Depending on your needs I can point you towards someone in the area. 

If the TIC split is reflected on the title and your partner is only selling his half of the interest you will not be subject to a gain. As long as your interest is unaffected you have no tax implications. In theory TICs are supposed to have separate books and can have different cost basis etc. I've had a scenario where a property was purchased by two separate entities 50-50 in separate 1031 transactions and two separate dates yielding disproportionate halves from the depreciable basis standpoint. Each entity will have to essentially run separate depreciation calcs every year.

Make sure you get a CPA who is familiar with local tax issues in Philly (BIRT+NPT). Guidance on BIRT and NPT taxes is very limited and as the transactions get more complex compliance becomes challenging. 

I would generally advise against holding real estate in s-corps. Tax implications are mostly negative as it pertains to real estate and s-corps. So a separate LLC would be my advice.

My advice would be to always have separate LLCs for separate rental properties. The partnership structure allows you a great deal of flexibility and while the number of tax filings goes up the record keeping and administrative burden remains the same. You still need to keep track of income/expenses on a per property basis even if you have 10 properties in one partnership.

In the similar fashion you track the initial seed capital contribution you should be tracking subsequent contributions needed to fund the construction etc. You should have individual bank accounts for each LLC and that will simplify the record keeping process. You can just track capital inflows and outflows off the bank statement to properly account for the annual activity.

The last point I will touch on is the management company concept. Management companies are something that often become a necessity as the real estate business scales up. A separate management entity is advisable and can be structured as an s-corp as it does not hold any capital assets. With some advanced planning, management fees (expenses on the rental property) and management income (income on the management company) can effectively manage the character of income (passive vs ordinary) and minimize your tax bill. 

The $6300 figure you cited is right for single taxpayers who cannot be claimed as dependents. Because you claim your kids as dependents they do not get the full $6300 standard deduction. The math gets a bit more complicated to calculate the adjusted deduction but the minimum is $1050 (scaling up with earned income). 

As for your second question if you pay them $399 each and have invoices from them supporting the work performed (and the payment is reasonable for that work) you do not have to file anything on their behalf. They fall under the $400 SE income threshold for filing and do not require tax returns. The invoices will be the substantiation for the $798 expense on the rental just like any other arms-length invoice.