All Forum Posts by: Account Closed

This is a section 8 property? Does cash flow include property management fee?

New investor doing market research.

Not sure where to begin.

Any thoughts/advice?

Hello -

I live in Long Island, New York.

I am exploring STR investments perhaps in markets near New York.

Just having a very hard time starting off. Not sure where to begin looking besides Zillow.

Any suggestions/advice/words of wisdom are appreciated.

Thanks.

Kislay Shah CPA

Investors - I have 25+ years of public accounting experience in the real estate space at your disposal. Let me help you with your pressing real estate tax questions. Shoot away!

As a specialized real estate CPA, I'm here to provide expert guidance on your most complex tax matters, from navigating 1031 exchanges and cost segregation studies to optimizing your rental property deductions and handling multi-entity structures. Whether you're a seasoned real estate investor or just starting out, fire some questions at me and let me provide you with some insight that I'm hoping will be helpful to you in your investing journey!

Answering questions today. Feel free to shoot any questions you may have!

As a specialized real estate CPA, I'm here to provide expert guidance on your most complex tax matters, from navigating 1031 exchanges and cost segregation studies to optimizing your rental property deductions and handling multi-entity structures. Whether you're a seasoned real estate investor or just starting out, fire some questions at me and let me provide you with some insight that I'm hoping will be helpful to you in your investing journey!

1. Your federal income tax rate is 35%. This means that for every $1 of rental income you generate, you save $0.35 in federal income tax.
2. You mentioned an Illinois state income tax rate of 7.75%. Similar to federal tax, for every $1 of rental income, you save $0.0775 in state income tax.
3. The Social Security tax rate is 6.2% for employees. However, as a high earner, you might be subject to the Social Security tax wage base limit, which is $147,000 (as of 2022). Once your income exceeds this limit, you no longer pay Social Security tax on additional income. Therefore, if your W-2 income exceeds this threshold, you wouldn't save on Social Security tax for rental income.
4. The Medicare tax rate is 1.45% for employees. Additionally, high-income earners are subject to the Net Investment Income Tax (NIIT) of 3.8% on certain investment income, including rental income. So, your combined Medicare and NIIT tax rate would be 5.3%.
5. To calculate the total tax savings on rental income, you would add up the savings from federal and state income tax, and Medicare/NIIT tax:
6. Total Tax Savings = Federal Tax Savings + State Tax Savings + Medicare/NIIT Tax Saving
7. Given your tax rates, you can calculate the total savings. However, remember to consider deductions, depreciation, and other tax benefits associated with rental income. 

1. Insurance Proceeds: Generally, insurance proceeds received to repair or replace property damaged in a hail storm are not taxable. This is because the purpose of insurance is to restore the property to its pre-damaged condition. So, your CPA is correct in saying that the insurance proceeds won't be taxable assuming they were used to repair or replace the damaged portion of the property.
2. Cost Segregation Study (CSS): A CSS is a tax planning tool that allows you to accelerate depreciation deductions by identifying and reclassifying certain components of your property as shorter-lived assets. This can result in increased depreciation deductions in the early years of ownership.
3. Partial Disposition: When a component of a property is replaced or disposed of, you can take a partial disposition deduction for the remaining undepreciated basis of that component. This allows you to recognize the loss associated with the disposed component without having to wait until the entire property is disposed of.

In your case, the replacement of the roof due to hail damage would qualify as a partial disposition event. You would be able to take a partial disposition deduction for the remaining undepreciated basis of the old roof that was disposed of due to the damage. This is separate from the tax treatment of the insurance proceeds.

Your CPA's suggestion of not doing a partial disposition and instead offsetting the insurance proceeds with the cost of the new roof might be less favorable in terms of tax planning. By not taking a partial disposition deduction, you would be missing out on potential tax benefits associated with recognizing the loss on the disposed roof component.

It's not uncommon for CPAs to be left out of initial discussions when structuring real estate funds, and there are several reasons for this:

1. Historical Roles: Traditionally, attorneys and general partners (GPs) have taken the lead in structuring real estate funds, with CPAs brought in later to handle tax and financial matters. This historical division of roles might lead to CPAs being excluded from initial discussions.
2. Perceived Scope: GPs and attorneys may perceive the initial structuring phase as primarily legal in nature, focusing on regulatory compliance, fund agreements, and investment structures. While tax implications are significant, they might not be seen as central during the initial formation stage.
3. Specialized Expertise: Attorneys and GPs often have specialized expertise in real estate law and investment strategy, which they prioritize in the early stages of fund development. CPAs, while essential for tax optimization and financial oversight, may not always be viewed as indispensable in the initial planning phase.
4. Communication Gaps: There may be communication gaps or misunderstandings about the roles and contributions of CPAs versus attorneys and GPs. CPAs might not always be proactive in asserting their value in the initial structuring process, leading to their exclusion from early discussions.

However, recognizing the importance of CPAs in optimizing tax efficiency, mitigating risks, and ensuring financial compliance, it's beneficial for GPs and their legal teams to involve CPAs from the outset. By integrating CPAs into the initial discussions, real estate funds can be structured more effectively, with tax considerations and financial goals addressed comprehensively from the start, ultimately avoiding costly amendments and adjustments down the line.