All Forum Posts by: Kory Reynolds

To break this down...

To get the benefit of REPS, it is a two part test.

1) more than 50% of hours AND over 750 hours in real property trades or businesses. spouses cannot combine time to meet these thresholds, one spouse must hit this on their own. If you meet this first test, you are a REP...now determine if you can use the benefits of it.

2) if you or your spouse meet test 1, THEN you can make an election to combine all your RENTAL activities together for purposes of determining if materially participate in your rental activities.  

3) So you met test 1, made the election under #2 - now you see if you materially participate in your rental activities.  The hours for material participation can come from both husband and wife.  There are 7 material participation tests, the most common of which are at least 500 hours in the activity, or at least 100 which is more than anyone else.

You are correct that if one of you meets the REPS thresholds for 2024, and you make the said election, it does NOT free up any passive activity losses from prior years.  This is actually a problem - since now you are treating them as one activity, they will carry forward indefinitely.  If you dispose of one property, you haven't disposed of your whole rental activity, so that loss is not released.  You can end up in an odd spot where these previously disallowed losses are disallowed nearly permanently until either a) you are no longer a real estate professional and you un-aggregate your rentals or b) every single one of your rental activities is disposed of.

I have one client right now with some material passive activity loss carryforwards, that the decision was made to wait to make the REPS related election until they utilize these loss carryforwards, so they don't become trapped.  In our case they'll have it cleaned up within the next year or two, so the timing worked out well.

REPS status alone is not substantial a risk of being audited.  It is literally 90% of my clients and I see maybe 1 audit a year at most, and it isn't even on the REPS issue.  But ensure it is legit, if you are audited, and you didn't rightfully take the position, it's not just the tax - you'll be hit with late payment penalties, substantial underpayment penalties, interest, and potentially fraud related penalties if it can be determined that you knew you didn't meet the qualifications but claimed it anyways.  If you did rightfully claim the position, the audit is just an annoyance.

Interestingly, each of my clients who have been audited who have had REPS status in place, it was never questioned at all... I can only assume that it is because the situation was so clear cut that they were a REP (IE full time development), the audits were focused around other issues.

Another vote for all the same firm - I have never actually seen a client divide up work based on CPAs in different states for different projects.  Sounds like a great way to be very disjointed!

I do have a handful of clients that have ended up using multiple CPAs just due to who their partners were on different deals, and even in those cases they almost always end up consolidating to a single CPA - taxes are enough of a headache without dealing with 3 different professionals who each only have a slice of the whole picture.

If you are going to regularly be investing across the country, it doesn't hurt to work with a firm that has State and Local Tax (often referred to as "SALT") internal resources, though typically this does come from larger firms with larger fees.  In that scenario even though the given professional might have a heavy amount of experience in a handful of jurisdictions, they have someone on their team that they can pull in for areas they aren't familiar with. That is the situation I am in - while I work with investors nationwide, I am most heavily focused in New England, but our firm has a SALT team that I can pull in to help on the other states I don't regularly see.

Possibly.  Travel expenses can be very tricky - there are a bunch of bifurcations based on if the trip is primarily for personal, primarily for business, or somewhere in-between - including the allocation of airfare and other costs.  If the trip is mostly personal, then only the expenses directly related to looking at potential investment properties would actually be deductible, which is likely rather minimal - maybe some gas or Uber costs to get there?

That said, there would be arguably no business purpose to bringing your family along with you, so even if you are spending the entire time searching for real estate. If you brought your spouse and 2 kids with you, and you could argue all of your argue of your time on the trip was looking at real estate, and your personal business and activity circumstance defends being able to immediately deduct it and not treat it as a start up cost... likely 75% of much of the travel costs (airfare, food, etc) would be non-deductible.  Bringing your family along also puts a serious damper on that the primary purpose of the trip was actually for business - not impossible, but in my eyes it definitely taints it in a way that you really want to ensure everything is buttoned down on the business purpose and the actual business activity that occurred.

You could reach out to any number of accountants who post regularly on these forums, some are taking clients, some are not, some are only taking specific types of clients, but it can be worth the conversation.  Keep in mind it is not only a CPA firm that is a good fit for you, but also that you are a good fit for them.

It can greatly depend on your activity and where you plan on taking it - in example, in your direct situation with just a single short term rental in partnership, a firm like mine would destroy you with fees - too much firepower for a relatively small situation. 

 They beat me to it, they already have their own family compound on an island ;)

Do you want the audit work too? Maybe we can pass that off for $245k from the current $250k ;)

Too good of a client to ever give up by choice - they are just good people and model clients, which on any engagement is a rarity, never mind such a large one.  

It sounds like you are mashing a lot of different things together here.

It does not matter at all if you have an LLC, or if you, or your wife is the owner - it doesn't change any of the tax positioning in the slightest.

The test to be a qualified Real Estate Professional is at least 750 hours in real property trades or businesses AND  over 50% of your professional time. Thus as a full time W-2 employee, assuming you work 2,080 hours a year, you would need to work 2,081 hours in your real property trades or businesses to be a qualified real estate professional. These hours don't care if you have an LLC or not - it is based on your actual hours worked.

The exact same test applies to your wife. With no W-2 job, she would need to work 750 REAL HOURS in your real property trade or business. Given she has no other job, this 750 hours would be over 50% of her time, so she would qualify. Her work in this way again is not influenced at all by if it is an LLC in her name, your name, or both - it is based on actual hours worked.

IF and AFTER you meet the above tests, you need to prove that you materially participate in your RENTAL trades or businesses, generally this is at least 500 hours per year, but there are other tests as well.

If you qualify for all of the above, now you can use tax losses from rental real estate to offset W-2 income. Again, it doesn't matter which of you owns the LLC.

An alternative if you or your wife are unable to meet the first 750 hour / 50% test, is the "Short Term Rental Loophole", which has been discussed at great length on these forums.

Reviewing it, it seems that they are using AI type software to run the exchange.

My experience so far with AI software in the tax realm is that it is a far cry from being ready for a lack of human intervention and oversight.  Sometimes it will seem great, but then it gets it horribly wrong with confidence.

While most exchanges are relatively vanilla, using an experienced QI and tax advisors in the process is well worth the avoidance of blowing up a 1031.  The costs of a QI are also often relatively minimal in comparison to the interest and penalties you would pay if it is blown up.

You are also parking significant sums of money with the QI - that alone is worth using a reputable QI to ensure your funds don't disappear. 

In a general way...yes.  Generally from the day you purchase a property through the day you sell it (in a taxable transaction), you'll be taxed on your net accretion of cash flow over that time period.

The timing of when income is taxed is likely going to be much different than when the cash flow is received though. 

For my clients real estate businesses they pay between $4,000 and $650k purely for tax prep and tax consulting, does that help? ;)

Michael's response here is the most valid one and is summed up by "it depends".