All Forum Posts by: Kory Reynolds

I have talked with several clients who have had a similar thought process - in their mind almost a "block chain" for the real estate investment.

Along with the SEC regulations regarding investment offerings, the IRS has neatly placed this "blockchain" type idea as being a tax partnership.  In this case, a tax partnership with an incredibly complex allocation structure.  In short...you are looking to create an open fund with some time share type qualities.  Meaning - it has been done, just by a different name, and maybe with slightly different terms.

This is an unnecessarily complex structure - what are you trying to accomplish with it?  Figure out what you are trying to accomplish, and then look for the simplest structure that will accomplish that.

Generally working with irrevocable trusts is primarily an estate tax planning tool.  Perhaps you need that now, perhaps you don't.  It is easy to start simple and go more complex as needed.  Rather than start out complex and find a need to unwind your complexity to something simpler.  Complexity also brings about fees - fees to set it up, and fees for annual compliance, and annual registrations for each level.   It would be a bummer to generate $10k in up front fees, and $5k+ a year in compliance costs for something that could have been done for a single $100 annual state registration.

Quite simply...(generally)...just put it in an LLC, respect that LLC, and get adequate insurance. Good chance you'll be required to personally guarantee the loan anyways, no matter what your structure is. I have clients with 9 figures of assets under management that don't do anything near as messy as you are proposing - they just use separate LLCs for each deal and adequate insurance, and then they separately will use irrevocable trusts as needed for their estate planning needs.

Hey there neighbor!

It might be worth starting the conversation with your existing CPA on what you would like from them.  New Hampshire has a relatively unique business profits tax system that is foreign to most of the country.  More often than not, I see out of state firms make errors on anything but the very simplest NH situation (heck, a lot of NH tax preparers also get it wrong).  Our firm actually does no small amount of work with private equity firms that buy NH based businesses... and then don't want to deal with the NH tax issues and farm it out.  Not as many complexities with a few rentals, but there can still be significant issues depending on entity structure - even if they are all "disregarded" entities for federal tax purposes.

If your W-2 is your full time gig, and they are all passive long term rentals, there very well could be likely not a lot of active planning to do on the real estate side, outside of getting some general knowledge out there, having some longer term plans, and ensure deductions are being maximized in the isolation of those 5 rentals.

You can most definitely do this.

Take $x of your money, and invest it into a Qualified Opportunity Fund - lots of them out there looking for cash.  On that $x, you can defer $x of your gain, which would then be deferred from 2024, and taken into income on 12/31/2026.

Working with your tax advisor you could toy around with what is the right amount to defer from 2024 until 2026, and just invest that amount.  

Consider the cash flow timing - you'll recognize that gain in 2026, and unless the QOF does a cash out refi in the next few years, you'll likely need to source the cash to pay that gain from another source.  Or consider timing of other deductions into 2026 (if available) to offset that gain.

Note that you cannot defer the ordinary income recapture, if any, that you have on the sale of your rentals into the QOF - only capital/1231 gains.

The IRS has tiers of accepted cost allocation techniques for real estate - a total of 6 tiers!  From what they are most happy with to least excited about below:

1. Detailed Engineering Approach from Actual Cost Records
2. Detailed Engineering Cost Estimate Approach
3. Survey or Letter Approach
4. Residual Estimation Approach
5. Sampling or Modeling Approach
6. "Rule of Thumb" Approach

An engineering study is the gold standard.  The DIY cost segregation CAN be accepted and stand up in audit, but it is number 5 in the tiers given the potential for significant inaccuracies.  It is one step above "eh, I just pull 20% of all my buildings for 1245 property".   The more unique your property is, the more inaccurate the DIY approach will be.

I do have clients that with smaller properties do tend to do the DIY cost segregation approach.  The ones I prefer the most are from the companies that also do real engineer studies (KBKG).  I would also only go with an option that provides audit support / audit protection - ensure that if you do come under scrutiny, they will come out to do a full engineer study to defend it.  Most of these companies charge a few hundred more for that option, but if you get audited once, that will pay for that additional fee 100x over.

The full engineer studies also tend to be MUUUCCH better for addressing things like partial asset dispositions in the future, since they actually went through the building and picked out what it has and what all the pieces are.  The engineer studies also tend to get a more aggressive (good tax) result.  

Consider if you have a few buildings that a cost seg team could do - I certainly have seen discounts for bundling them together that pulls the cost down.  The loose rule of thumb would be for a building cost of $750k-$1m+, it is worth it to just get a normal engineer study.

I am going to keep this more general, and I definitely cannot speak to PA specific on real estate transfer taxes.  I can say that in my home state of NH (and many states have similar provisions), that if the beneficial owner of the property remains the same (In NH this means the partners are the same), then there is no real estate transfer tax.

Based on the high level facts you provided, I would consider a structure like the below.  To be clear... you should have a much more detailed dive with your paid professionals to address whatever other caveats might be out there, this is a starting point.  There are multiple ways to skin this cat.

1) Create a new LLC with identical ownership

2) From the "old" LLC distribute TIC interests in the improvable parcel prorata to all the members. Many issues to consider here regarding the mortgage, if PA had a real estate transfer tax issue with this, if there any deals in place that would restrict you from doing this, getting permission from the bank to do this, annoying legal fees it will cost to do this...

3) The partners then distribute their TIC interests in this land into the New LLC. See disclaimer about various headaches above.

4) One day in the future, do the reverse to put them back together.

The above structure would generally be income tax free given the distribution or contribution of property from a partnership is typically not a taxable event.  There can always be potential tax issues when debt is moving around due to changes in debt basis.  

It is extremely important that your bank be on board with every step of the way. You don't want to end up triggering unknowingly some due on sale / transfer clause on your mortgage.  It will really come down to if there is enough money on the table to make it all the transfer costs (legal and accounting), and ongoing compliance costs (additional tax returns) worth it.

I don't believe he is a member of this forum, but he does great, detailed, and well thought out work, and has been in the game a long time.  

Mark Vorkapich of Gladstone Strategies

https://www.gladstonestrategies.com/

I do agree with the above on checking with your current CPA to see if they have a preferred provider - sometimes it is easier and with better results if your team already has a good relationship.  The reason i like working with Mark (along with the quality of what he puts out, which is better than most cost seg studies I have seen) is we have a great working relationship that we can readily discuss a client and their goals.

Many factors go into pricing a new engagement, I have clients that are charged a few thousand up to a few hundred thousand.  

1) Number of properties / types of properties (Commercial / multi family / short term / mixed use / triple net / TIC / etc...)

2) Number of entities / type of entities / complexity of those entities (syndication/waterfall)

3) Existence of trusts / nature of those trusts

4) Number of state filings / which states (some states are way worse than others)

5) quality of record keeping

6) how difficult you are to deal with as a human being ;)

7) how much additional consulting and planning services will be needed

8) nature of your business

9) when do you want it done by? Filed timely? good with an extension?

10) volume and type of transactions (acquisitions / sales / 1031 / drop and swap / contributed/distributed property in a partnership)

Agreed with the others - looking at MA there aren't any special tax considerations that I would worry about having someone local, you could work with someone just about anywhere remotely.  If you are subject to the MA "Millionaires" tax there is some (minor) planning that can be done, but nothing that requires significant knowledge to do it.  

My firm is a good old fashioned brick and mortar accounting firm, and I still work with the great majority of my clients (even those that are local) electronically.  Personally I do still enjoy a good in person meeting - if you are looking for a relationship it is just hard to beat sitting down across the table from someone.  

To be clear even though I am local to you (we have offices in Boston and Woburn), we aren't going to be the right fit for what you have going on, but I do encourage you to reach out to a few of the folks who posted above who would probably be a great fit for you.

What is the capital gains from?  What was your involvement - passive vs non passive? There could be 100 answers to this question depending on your situation.  My initial advice would be don't let the tax tail wag the dog - don't make any decisions too heavily based on saving you tax.  There has been too much of that lately with people too excited about the short term rental "loophole", resulting in bad investments just to save a few bucks in tax.

I have a ready solution - say you sold a rental property for $1m, then you can just pay me $1m in fees to talk about it, and you are at net $0 of income ;)