All Forum Posts by: Kory Reynolds

I have a few clients that are inadvertently pursuing this strategy - but it is more about business decisions and swapping to larger properties.

To do so purely for tax purposes, especially on a one year turn around schedule, assuming the standard 4-6% commissions, legal fees, real estate transfer taxes, etc - nevermind the headache of finding a suitable replacement property in the correct time frame, exchange fees, more cost seg fees, etc - this gets to be fairly expensive.  It works out great for the professionals though!

 If you qualify as a REP you can utilize those losses to offset your Income subject to Federal Income Taxes.  However, you can actually end up in a spot where you have no Federal Income Tax, but you still owe Self Employment Tax.  Rental losses are not self-employment income losses - so they don't offset the assessment of that 15.3% / 2.9% / 3.8% level of tax.

The "easy" answer - short term rentals where your brother participates materially in the operations - this would mean 500+ hours a year.

It sounds simple from a tax planning perspective.  In reality he is a high paid, likely already working a ton, attorney - he very well may not want to average an extra 10 hours a week of work year round to make it work.  He's already making (effectively) around $350/hr - if he's paid on production he could also just make another $175k a year with those hours.  Most people in this situation do not want a part time job.  Maybe he's the exception.

But the good news is - no matter what you do, if your brother just leaves it all as "passive" and doesn't mess with anything, whether short term rentals, or traditional rentals - the right tax planning could mean a box of his investment dollars that is effectively able to grow tax free.  As good as offsetting all his W-2 / Business income? Not at all, but it is still available tax free growth.

Agreed - plus two additional thoughts:

1) I always recommend having your CPA also review the drafted operating agreement for the tax issues.  Some attorneys are good at the tax issues.  Most (in my experience) are not.

2) You need to bring all of your terms to the attorney - how to structure distributions (are you 50/50 on all operating distributions? Is his capital only paid back when there is a "capital" event like a sale or refinance? Does he earn a preferred return for putting up all the capital?) If they do a lot of these, maybe they can help you talk through some ideas.  A CPA who specializes in partnership issues can also likely talk through these issues with you.

3) Depending on the size of the deal - Keep It Simple - the number of really complex agreements that come across my desk for a $500k property is crazy, and it ends up costing as much to do those tax returns as a comparable $5m deal

As a KS resident, KS will tax 100% of your income, no matter where it is sourced to.  This also includes any potential benefits for tax losses, no matter where they are sourced to.

Given the property is in MO, it would also be subject to income tax reporting in that state, unless there are any exceptions to having a filing requirement there (I don't know MO rules off the top of my head).  

If you ever incur a state income tax in MO, you would typically be able to take that amount paid as a credit against your KS taxes paid, so you won't end up double taxed to both states.

Are you wondering why a hotel has tax liens, or why it has "many rooms" on tax liens?

Some hotels actually have a condo like structure, where people can own the units, but perhaps are limited on their personal use to only a certain amount of the year - the rest of the year it is in the rental pool managed by the hotel.

If numerous room owners stopped paying their bills, you could get tax liens on numerous separately owned units.

Hotels are a tough business, an issue I also see come up with them often is that they require refreshes, expensive and relatively often - at least once every 10 years, if not more often.  With less experienced or just poor planning operators, it isn't uncommon that they spend years distributing all the cash out to the owners, and then the time comes for a multi million dollar refresh to maintain the hotel brand, and no one wants to cough up the money back into the entity.

 The laughs are because very few, if any, tax advisors would take on a new client right now to get the tax return filed in the next 13 days, and your pool is made even smaller when looking for those with a specific expertise.

At this point many of us are busy with our existing clients, and wouldn't want to do those clients or ourselves the disservice of trying to cram in onboarding and full preparation of a brand new client in that span of time. 

So I wish you best of luck finding your needle in the haystack! 

Not sure if you have a direct question, but reading the questions between the lines on when a property is actually considered to be in service.

Facts and circumstances.

Generally for a rental property it is "in service" when it is "ready and available for rent" - meaning you are marketing it for rent, and a tenant could utilize a property that day. When it is a new development, it isn't uncommon to see someone use the date the Certificate of Occupancy was issued - perhaps that marks the "ready", but it still might not be "available".

So you can certainly have a property in service in a given year, but not actually have any rental income - but certainly your facts and circumstances are much better if you can actually get a tenant in there, that (should) shore up your defense on that question ever coming up unless you are playing weird games just to get a given in service date for tax purposes.

You are mixing and matching a number of concepts incorrectly. Some cliff notes:

REP status requires 750 hours in real estate activities, and then after you hit that, the test is materially participating in your rental activities.

If it is a short term rental with less than a 7 day rental period, if you materially participate, which could include at least 100 hours and that is more than anyone else, then yes possibly can use the bonus depreciation against other sources of non-passive income.  This is not a "real estate rental income" activity as defined by the IRS, so whether you are a REP or not, you can take this benefit.

All of this is separate from a QOZ Investment, which would require you to first recognize a capital gain from another source (say a stock sale), invest that gain, hold it in a Corporate or Partnership structure (likely partnership), meeting the substantial improvement qualifications of being a QOZB, and then yes, you get to avoid the depreciation recapture at the end of the 10 year hold period, at least for the portion of your investment attributable to the original gain that you invested in the project.  All normal capital invested that was not generated from a gain that you deferred is still subject to tax.

Sure it can be a write off, but my question is if it is the highest and best use of your time (or the given employees time) to be running a skid steer - transporting it, storage, maintenance, cleaning, etc, and if it still makes sense if you need to hire someone to run it for you and take care of the other things.

Add up all those recurring costs - maintaining the machine, maintaining the trailer, having a large enough truck to tow it, insurance and registration for all of the above, your time or your employees time related to all of the above...even at $14k a year it might be attractive enough to keep paying that and having them drop it off at the job site for you.

A brand new machine could easily cost you over 6 figures - that's 7 years of rentals at $14k/year before including all the holding costs.  If it is going to open up other opportunities for you, all the better, perhaps it is worth it.

I recently had a client buy a septic pumping truck given they were spending a significant sum on the service for their RV parks - certainly are scenarios out there that it makes good business sense.