All Forum Posts by: Kelly McClellan

@Chad Slater

The short answer is yes because the income is arising from your personal services.

(IRC. 401(c)(2)(A)(I); Reg. §1.401-10(c)(1).

The purpose of the earned income rules from self-employment is to provide a solo 401k plan for the self-employed so that they can save for retirement, and to exclude inactive owners whose income is derived only from investments as investment income is not considered “earned income.”

Lastly, you will want to preform the management of the properties continually and regularity with the intent to generate income or profit; therefore, you rental activity will be deemed a business.

You're welcome, Kelly. FYI I know of a 1031 DST provider who refunds to investors (upfront) the usual 7%+ upfront fees (which can be a substantial savings and make it equivalent to a non-DST structure). They work through referral only, so can't post it publicly here...but if you're interested, PM me.

@Kelly McClellan I would echo the perspective from @Jim Pfeifer regarding cost segregation and bonus depreciation. Keep in mind, some property types will garner more bonus depreciation than others. Bonus depreciation is derived from the portion of the property's value with a shorter useful life than the buildings themselves. Therefore the property types that are the most favorable to generate bonus depreciation will be those with a high degree of what the tax code refers to as "land improvements". Examples are mobile home parks, RV parks, and golf courses where the value of the property is not primarily derived from building(s) but rather from the improvements to the land. In a mobile home park or RV park, most of the value is in the underground infrastructure, roads, landscaping, amenities, pools, fencing, pads, utility pedestals, etc, while only a small portion of the value comes from a building, like a clubhouse or laundry facility. In a similar fashion, if you can imagine how much landscaping and underground infrastructure is in a golf course as compared to the clubhouse, that will give an indication of why an extremely high percentage of the property's value is allocated to the land improvements.

When a property is purchased, a cost segregation study should be performed, wherein the value of the property will be segregated into land (which is not depreciated), buildings (which are depreciated on a 39 or 27.5 year schedule), land improvements (15 year schedule), and other smaller items like personal property. If the bonus election is taken, then 100% of the allocation to the land improvements can be taken as a passive loss in the year the property was purchased. Properly executed, an investment in these types of property can garner passive losses equal to or greater than the amount of capital invested.

This can be executed with a direct investment yourself, or through a passive investment in a syndication with a sponsor who is taking the bonus election. If you invest passively you should receive your pro rata allocation of bonus depreciation on your K1 along with the other investors. Either way, you should be able to garner passive losses equal to or greater than the amount of capital invested.

Those passive losses can be used to offset the gains you have incurred (or gains you expect to incur) as long as the gain AND the investment where bonus depreciation is being taken occur in the same calendar year. Any allocation of passive losses you cannot use in that calendar year will carry over, so they can be used in subsequent years. I am not a tax advisor or a CPA. This perspective is solely from my own experience in managing mobile home park funds and working with the tax experts around us.

All the best, 

Jack

The paper losses from a syndication can be awesome. Many will provide you 70-100% loss in year 1 through cost segregation and bonus depreciation. Bonus depreciation is phasing out over the next several years, so this is something to consider. I would suggest reaching out to a qualified CPA to discuss this. Our company uses Clifton Larson Allen, which is a firm that have a real estate division. 

I am not a CPA, but happy to chat about our experiences, both on the LP and GP side of a syndication

Hello Kelly,

I too am looking into the possibility of entering to a more passive role in my investment holdings. You mentioned that you entered into a DST 1031 exchange. How did that work out?

I own both direct/active real estate and passive real estate (syndication/crowdfunding) in my portfolio (which I use to support myself and my family).

In my opinion, both have their pros and cons and neither is 100% superior to the other. And I feel the ideal portfolio can benefit from the diversification of both.

Having said that...I know you're asking about passive. And one of the main advantages of passive investments (via syndication/crowdfunding) is that you can hire a manager who has years more experience than you can ever hope to obtain yourself.

And once you finish the due diligence, your work is done: it's completely passive.

Also, rather than taking a large amount of money and investing into one single directly owned property, you can split it up into much smaller chunks across many different passive investments. This can allow a person to get much better diversification protection across geographies, asset types, strategies, investment subclasses etc. Versus putting all the eggs into one basket.

As far as returns to expect: I saw a post above where a person made a claim about these only having a very narrow range of returns to expect. I'm sure it's accurate from their personal point of view but as someone sees hundreds of these deals each month, I can tell it's not accurate for the wider market (at all). And you there's actually a very wide spectrum ( and it depends on your personal risk tolerance, unique financial goals, unique financial situation etc. as far as what works for you.).

The downside with passive is that someone has to be comfortable with turning over control to someone else. That means learning how to vet a manager. Not everyone can do that and not everyone feels comfortable turning over control. So it's not a fit for everyone. Also there is a management fee to pay for all of the above. So someone who is looking purely to maximize potential return (and has unlimited time and/or is just starting out building their wealth) is unlikely to find this a good fit.

Hi @Kelly McClellan. I have searched far and wide for a great real estate CPA and tax strategist and it turns out that I found one in right in your area, in a suburb of Columbus. Reach out to me if you want to connect to them. 

It's great to get a good community when transitioning to passive investments.  It turns out one of the best communities is right there in your area, in Dublin, OH, Left Field Investors.  I highly recommend that you connect with Left Field Investors and @Jim Pfeifer to learn more about passive investing and to strengthen your knowledge, community, etc.  I also recommend getting @Brian Burke's excellent book The Hands-Off Investor. Good luck!

Never 10k each? Please explain when you get a chance. Curious to hear more!

I started with turnkey remote rentals in 2009-2015 while working my engineering W2 job. Then went into syndications once my net worth went over 500k.

If you make over 150-250k and your net worth is over 500k then I would look to going passive soon. Its a total mistake to think you are going to get 10 fannie loans in each spouses name... I thought that was my dream at one time.

Investing will get your net worth over 3-4m pretty quickly and that that point its about being passive and getting a life than being a busy bee.