All Forum Posts by: Katherine Serrell

Hi Charissa. Great question!

You can write off almost anything. You need to maintain records of what was spent, what day it was spent, and what the "business purpose" was. The question becomes "how much" and "at what point" can you write off. A good CPA that specializes in real estate & leverages sophisticated tax software (not just some H&R block or Turbotax person) will help guide you to maximize your after-tax wealth and mitigate audit risk. "The Book on Tax Strategies for the Savvy Real Estate Investor" is a good place to start if you want to get a preliminary understanding of tax. 

I say it matters "at what point" because it matters how you originally acquired the property and how long ago. For example: if you bought the property as a primary for a live-in flip or if you lived at the property for 2 of the last 5 years, it will change the tax treatment for certain items and your capital gain. If you bought the property, renovated, and sold within a 12-month window versus a 12-month + 1 day window... that will also determine the tax treatment for certain expenses and your capital gain. If you or your spouse is considered (or can be considered) a real estate professional.. that will also impact the fact pattern. 

The list is truly infinite but in short, anything that you can remotely justify as related to your 'business' or a business-related activity (i.e. driving to Lowes for paint, phone bill, phone payment, car insurance, car payment, car repairs, home office expenses, home office depreciation, temporary housing, laptop/equipment purchase, etc) you should keep track of and turn it over to your CPA when the time comes. Even if you think you can do your taxes yourself - DONT. I am a CPA and I don't do my own taxes even though I know how to. I don't "specialize" in real estate tax (I am on the consulting/audit side) and the tax law and tax treatment changes frequently so unless this is your niche you should pay the expert. I also like to think of having someone else sign off on my return as an "insurance policy" so in the (hopefully) unlikely event I get audited, someone will go to bat for me. On average, you will pay around $800-1000 for your tax return if you just have one flip you are working on.

(Note: if the CPA firm tries to up-sell you on a subscription-based service like "year-round tax consulting" or "on-demand bookkeeping from one of our experts" etc etc you don't need that until you have a lot going on. It is WAY cheaper to just pay for an hour of tax consulting (like $100-250) mid-year if you end up needing it rather than to sign up for some expensive subscription-based service.)

Unfortunately, there is not a "one-stop shop" for this. If you are really trying to be conservative with making a decision, I personally think the best approach is to find areas where they have *recently* changed the STR laws to be in favor of STRs so that way you at least know that a decision has already been made versus you waiting to see what the next few months would look like.

Another option is to look on the local real estate investors association page to see news articles and recent blogs are hinting at upcoming changes. For example, my local REIA covers like 10 municipalities (the 3ish cities and surrounding towns) so that is the closest thing to a "one-stop-shop" available in my market.

You will drive yourself crazy if you try to make decisions off of predicting what local politicians will do. It is always a toss-up. If you are trying to hedge yourself a bit, you can always find areas where if STRs dont work you can make MTRs work or "worst case scenario" still cash flow or at a minimum breakeven if you end up not being able to use the property as a short-term rental. Alternatively, you can look for properties just outside city/town limits so you can get the benefit of proximity without the red-tape.

Quote from @Benjamin Carver:

Hello BP! My wife and I are looking into possibly moving to upper NC next year and are trying to get a sense of what works and what doesn't. Is anyone house-hacking somewhere in the triangle? We've looked at the triad as well, and that might end up being an option too. From what I can see, small multi-family is a long-shot. We are a-okay with house hacking by the room, garage conversions, etc. We understand that getting creative is kind of a must in a lot of markets nowadays. Looking forward to hearing some local insight and connecting, thanks for reading!

Hi Benjamin! I am on my 3rd (soon to be 4th) househack in Raleigh using all low-down payment loans. Would love to connect and help in anyway I can.

I have been doing mid-term and short-term rentals by the room in my house hacks and it has been a cash cow and surprisingly fun. Happy to share my experience and answer any questions you may have. 

So much depends on the fact pattern. I had a similar situation in 2021. Normally you would not be able to write these off because the asset was not 'placed into service' that fiscal year. You need to discuss with a good CPA well-versed in real estate. A lot more additional info is needed to be able to provide any useful advice such as..

Do you have other short term rentals or long term rentals?

Are you actively or passively managing your existing portfolio?

Do you have a full-time job or are you or your spouse considered a real estate professional? 

What other kind of income you have and what deductions have you taken or do you plan to take?

What specific repairs did you make? Were these capital improvements that can be depreciated or were they condsidered routine maintence and repairs? 

What kind of aquisition expenses did you have? Closing costs, paid points, etc.

Do you plan on earning more or less income next year and how will that impact your tax liability?

The list goes on..All of the above are relevant and there is not really a clear answer becuase it depends on your personal situation. There are loss limitations, real-estate specific guidance, depreciation schedules to consider, etc. You really need a good CPA that can leverage sophisticated software (i.e. not turbo tax or H&R Block) to determine what the best tax stance to take is based on the fact pattern for this year and moving forward because what might save you a few dollars this year may cost you more next year. 

Also, for loan purposes, showing a huge real-estate related loss may not be your best move if you are trying to aquire more properties in the next year or two depending on your lender(s) and the kinds of loans you are trying to obtain. A good, real-estate savvy CPA will be able to give you the information necessary to help you weigh these pros and cons.

Great question! Mobile homes/Tiny homes catagorization was addressed in the IRS's Revenue Ruling 77-291. This ruling basically said that the determining factor is the way the mobile homes/tiny homes are attached to the land. If they are permanently attached (i.e. not on wheels, have a foundation), it is considered a building so that is 1250 property (27.5 year life). If it is truly a trailer on wheels that could somewhat easily be moved to another location, this is considered 1245 property (5 year life). 

Note that the land mobile homes, tiny homes, or regular homes sit on is NOT depreciable becuase you cant depreciate land. However, any "improvements" made to the land are depreciable such as sewer line, well/water lines, gravel/concrete pad, etc. 

I have heard a couple of people just make the tenants get P.O. boxes. Depending on your location, they are free or like $10-20 per month. 

Its a little inconveneient for the tenant becuase you have to go pick up your mail but if your tenant had amazon deliveries or needs an address for employment purposes they can still use a physical address such as the "#A" or "1/2" that you mentioned. You would just put up a visbile house number so delivery drivers could differentiate. 

Your state/county/city may have specific guidance on how security deposits need to be treated (i.e. in a depository account earning interest etc). 

The best way is to have all of your tenants pay online. Payrent.com is a popular one. If you dont want to spend money on an application or platform you can always default to an excel spreadsheet in google sheets or something similar so that way the data is live. If you dont mind spending some money up front... I use Buildium for property management. It handles lease applications, maintenance requests, online payments, etc. Its around $50/mo but you may not need or want that at this point. 

Tricky. I'd imagine that as long as you lived there 2 of the last 5 years it wouldnt matter how you split the property up as long as you had lived there for 2 of the last 5 years. Now, if your daughter and her family had been living there for the majority of the last 5 years, the IRS would likely recognize this as a tenant-landlord relationship (even if they werent paying rent) and would basically make the argument that you had turned that parcel into an investment property so you may end up paying long-term capital gains tax on that portion of the sale. 

Ultimately, you need to find a good CPA that specializes in real estate and file your taxes for you in a way that they could defend your tax stance in the event you got audited. I am a CPA but I dont even file my own taxes since I know that this isnt my area of expertise. So, coming from CPA, I cannot stress this enough ... find someone who specialized in real estate. I use Matt Lents with Tax Advantage based out of Jacksonville, FL...he's amazing and charges fair rates. He serves clients all over.

You cant sell the property to an LLC you own. That is not a true "sale" since you still have ownership. Its considered a related-party transaction.

Hope that helps!

CPA here...First off, it depends on if the house you are selling was at any point in time your primary residence. If you owner-occupied for 2 years out of the last 5, you will likely not pay any capital gains tax. 

On traditional flips, you will normally pay ordinary income tax on any gain upon the sale since this is considered "active income" which means you pay whatever your individual income tax rate is on the profit.

When it comes to flipping, there is so much involved from the tax side that you really need to talk to a good CPA that specialized in real estate and pay whatever they want you to to help you time things correctly and structure the deals so that you win. It will save you literally thousands and will act as an insurance policy in the event you get audited since someone else did your taxes and you didnt throw them into turbotax and hope for the best. 

You would have to do a quit claim deed to get the property to transfer to the LLC post-closing which would mean your lender could call the loan and you would be responsbible for paying it immediately or refinancing. It is unlikely the bank would do that but they absolutely can if they want. Personally, I just have really good insurance policies and umbrella liability policies. That being said, id say no its not beneficial for your first property. That is what the majority of small investors I know do until they have 4 or 5 properties or need to use a commercial loan. You shouldnt get an LLC in California. From what I have been told and experienced, it is easier to get an LLC in the state you will be buying the property in but its not required. A lot of people use Deleware to create their LLCs (you can google why).

I use Chase for all of my business banking. Their online banking and mobile platforms streamline everything for me really well (especially as an out-of-state investor). Plus, I have personal accounts with them so it simplifies transferring money back-and-forth. 

Hope that helps!