All Forum Posts by: Kory Reynolds

From an income tax perspective, the LLC provides you with absolutely no benefit.

Even from a "anonymity" perspective - if that is a Single Member LLC, the K-1 from those syndicates is still required by the IRS to be issued directly to the beneficial owner - you.

If you don't make it a single member LLC, say your spouse is also a member, now you have a partnership tax filing - if it holds a number of LLC interests, it is now a partnership filing that is a pain to file to roll all of those activities in and report it on to your personal returns.

In short...most likely it is best to keep it simple.  Just own it directly unless there is a real business or other investment reason not to do so.

@Michael Plaks is spot on - character wise, 1099-R income falls in the same "bucket" as a W-2 wage would be, thus to offset this income with real estate losses, it follows the exact same pathway (ST rental with material participation or REP status with traditional rentals), but since you don't have all your time sucked up with a W-2 job, you have much greater flexibility to hit those related hours thresholds under those paths as well.

No idea if he's taking clients - but if you are looking for local(ish) and qualified in TX, Michael is also likely a great one to reach out to.

I enjoy how this thread devolved from "Education Expenses" into someone promoting tax fraud since "they'll never figure it out".

But...occasionally they do. And whether they find all of these little issues or not, it will still result in thousands of professional fees and many hours of your time to deal with it.

Then you need to look at the other side, if you are mis-stating your tax returns, you will also end up providing bogus numbers to banks (also not a good one to lie to), potential investors, potential buyers, impacting the value of your properties by over stating your expenses...

Honesty is a great policy.  Any tax advisor you happen to find that encourages sketchy positions or fraud on the position that "they probably won't find it" - run for the hills.  Want to know what happens? One of their hundreds of clients gets picked for audit...and then maybe another...and then maybe all of them. Patterns of bad behavior will always come back to bite you, whether it is yours or just the actions of the bad professional.

A bit of a departure - but great post on this @Michael Plaks, this is one that is confused all the time.

It's a bottomless hole of fees! It will all depend on volume. A single LLC and a single revocable trust won't cost much. 100 LLCs and 10 trusts will cost a lot.

A simple revocable trust in many states won't cost you anything after it is set up.  To set up such a trust, including getting assets transferred in where appropriate.  

A single member LLC can be cheap to set up - a few hundred bucks between state registrations and a legal zoom operating agreement. You might end up paying a few hundred dollars a year to the state you set it up in, and the state you are actually doing business in.
Operating agreements by a real attorney are also not cheap - that can easily be several thousand dollars per LLC. Some states are expensive to have to register in - CA will run ya $800/year if you do business there. TX is only $300 or so of fees in the first year of the LLC, but then requires an annual report that someone needs to file.  My home state of NH is $102, every year, until you dissolve the LLC. My neighboring state of MA is $500/year per LLC.

Then it all depends on volume - more entities and trusts, more fees.

But...first and foremost...start investing (if that is your plan), get good insurance, and then only add in complexity as needed. The anonymity isn't near as big a deal as people make it out to be. I have yet to hear of a circumstance where a lawsuit wasn't pursued just because they could immediately find the beneficial owner. In the end...they know that the LLC likely carries some form of liability insurance as a condition of their mortgage, thus will have some decent funds to pay out. And they also know that there is likely equity in the property.

Speak to your own attorney about this, but don't add complexity for complexity sake.

 What will matter from an IRS perspective is when the burdens / benefits of ownership have actually been transferred.  So if I were your CPA, the questions I would be asking about what burdens and benefits you have related to the property before the end of the redemption period - what are your responsibilities related to the property? Can you rent, occupy, or utilize it in any manner? Are you responsible for any of the expenses of that property during that period? Can you renovate it? Could you sell it? Do you have any control over what the existing owner can do to the property? When do you obtain the rights to do these things?

Those are the questions the IRS would have on when determining when it was acquired by you.  What the official sale date according to the state might be is an interesting factoid, but it is just one of the facts and circumstances considered for "acquisition date" for IRS purposes - Benefits and Burdens is the test they are concerned about.

Simple answer, yes these are all normal things to utilize.

However, as to how they are used - that will depend entirely on where you are going and what you are trying to accomplish.

For tax purposes, given it is generally a bad idea to use an S-Corp or C-Corp for holding real estate, any other tax structure will have absolutely no difference from one another - IE an LLC taxed as a partnership, an LLC wholly owned by you and disregarded for tax purposes, owning directly, or owning through a revocable trust - all of these have the exact same tax result at the end of the day.

It Depends.

Potentially capital investments in the properties could have accelerated depreciation benefits (carpet, LVT, trim, appliances), while also allowing you to drive higher rents, thus saving on some taxes in the short run while driving increased values.  Similar green energy investments could be considered if you can make the numbers work (credits on some types of low income housing can be north of 50%).

Depending on how long these properties have been held, they could consider implementing cost segregation studies via a change in accounting method to accelerate some depreciation.

The operating proceeds could be re-deployed into new properties where cost segregation is an option to accelerate depreciation to offset proceeds.

If the properties are low basis and we are not maximizing the 199A deduction, maybe considering an S-Corp structure for management to be able to participate in retirement plans and also generate wages to use as a 199A base.  This would take some significant thinking - and maybe wait to see if 199A will actually be around past the end of 2025.

All of these (except the 199A) are tax deferral strategies - it is accelerating deductions now for tax savings now, for less deductions and more taxes later.

Nearly every state disallows bonus depreciation.  Many states have a limitation on 179 that is different from the Feds.

Some have really painful rules on dealing with that bonus depreciation addbacks.

You still benefit from the cost segregation study without the bonus depreciation - say your cost segregation study broke out $100k of 5 year property - now instead of spreading that out over 27.5 / 39 years, you get to take it over 5 years for your local state.

You still get the bonus depreciation amount on your Federal return, regardless of what the state does.

 Hey Michael - we definitely have a lot of consensus here - based on the facts in Texas, I would agree with you that it sounds like the burdens and benefits of ownership (or at least a significant amount of them) are transferred as of the auction date, and based on what you stated, I would also feel comfortable taking the same position for a TX property - it would certainly not contradict the revenue ruling given the related restrictions on the property and taking possession are an entirely different fact pattern, making the ruling moot in your scenario.

Which I think highlights even more one of my closing points (and your point as well on Jurisdictions) - this likely changes wildly by jurisdiction.  My (non lawyer) read of the SC rules paints a much different picture in those jurisdictions than what you discuss in TX - where it sounds like you own effectively nothing but a tax note until the close of the redemption period - you can't take possession and rent the property, real estate taxes during the period are still the responsibility of the original owner, etc.

The below is from the County of Charleston SC's website regarding the tax sale and how they work in that particular jurisdiction - certainly not the authoritative source of their state statutes, but for posting on a forum, I'll take it for now.  These apparent rules in SC do seem to mirror the revenue ruling (contrast that with TX rules).  Caveat to OP...find a lawyer to work with what the particular rules are in your specific county, and if they are any different, or if there are any caveats here regarding your obligations that we are not exploring.  This bit from the Charleston County website certainly paints a different picture than Michael has in Texas - where the Charleston County tax auction bidder has no rights to the property until after the deed is filed.

If the property is not redeemed by one year from the date of sale, then the property is tax titled to the highest bidder or their assignee approximately three months later through a tax deed. You have no rights to the property until the tax deed is filed at the Charleston County Register of Deeds (ROD) conveying the property to you as the new owner.

Once again in this post - go work with a good attorney in your state that is familiar with these rules, along with your CPA (local or not) to walk through the analysis as it applies to your particular jurisdictions. 

I'll fully admit, I have zero experience in dealing with tax auction transactions with my client base, but this is an excellent question, so... @Michael Plaks challenge accepted!

On the date of the auction, you hold a the rights to the delinquent taxes and associated payments - all of the benefits of ownership that you have at that point are only related to those delinquent taxes, and the future rights you might obtain after 12 months.  The general IRS test on determining acquisition date (this I have had to dig into a number of times) - do you have all the benefits and burdens of ownership, regardless of when title is transferred.  I didn't dig too deep here, but at least one SC county notes on their website that your interest in the property doesn't actually vest until after the expiration of the redemption period.  Following that up with when you have the benefit of ownership of real property - it isn't until you actually have taken possession of the property.

So then, the question comes, when that redemption period closes at the end of 12 months, does your holding period start with when you acquired the right to collect the delinquent taxes and interest? Or can you convey that original acquisition of this right to collect the delinquent taxes, which you then effectively exchange for the Deed if the redemption period has not been executed - but kept the same holding period?

My initial reaction from my walk through above would be that the holding period in the Real Estate doesn't begin until you have the rights and benefits associated with the real estate - so the earliest at the end of the redemption period, but really beginning once you take possession and can start doing stuff with the property.

Some further digging I found some examples of it, but if you were a paying client I would be spending more time to see if there were any subsequent changes to this rule - at the very least Bloomberg isn't calling it out on me ;) .  Check out Rev. Rul. 72-200, 1972-1 C.B. 233 (If you can find it on Google, I can only find it in Bloomberg / Answer Connect) - in which case there was an IRS Tax Lien Sale, with a mere 120 day redemption period.  It was determined that the holding period for the acquired real estate started after the end of the redemption period, given that is when the acquiring party started to enjoy the benefits of the real estate ownership.  Assuming  this revenue ruling still stands, it mirrors the SC situation nicely, meaning it would support your acquisition date of the real property not starting until you have taken possession.

I think this would be highly dependent on the terms of the local jurisdiction as well, so what might be correct in one jurisdiction, could be completely wrong in another depending on the rights acquired related to the property.

But happy to be pointed where I am wrong! In the end unless you are in an odd spot of selling the property within 12 months of the wrong date, it won't really matter for tax purposes.