All Forum Posts by: Kory Reynolds

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.

You might be asking the wrong questions at Fidelity (not sure if they do or do not allow this), but you aren't technically investing directly in real estate, you are investing in private equity partnerships that are investing in real estate.

They might not want you buying direct interests in real estate, but are okay with private equity investments.

There are a number of posters here on the forum that work with people nationwide, so you likely don't need to limit your search to just south Jersey.  Even my local to me clients - 95% of them we never meet in person each year.  

@Basit Siddiqi is exactly right that Philadelphia / NJ has some unique reporting headaches that are often screwed up, so whoever you work with, gauge their experience working in numerous jurisdictions, or their teams access to those subject matter experts.

Those in the construction world and rental world open themselves up to some substantial opportunities from a tax planning perspective, but also need to be sure they thread the needle carefully on the real estate professional rules to actually qualify for them.

Agreed with @Account Closed - putting real estate, or a real estate partnership - within an S-Corporation provides effectively no value, while creating significant headaches and tax consequences.

The only real benefit left for an S-Corp is partial shielding of employment taxes - but a rental property already doesn't produce any self-employment taxes, so the one benefit already doesn't apply to the rental.

Then you have problems with not getting basis in the debt of the property, having a lack of flexibility on future structure, issues with distributions in excess of basis...just nothing about it is good.

If the Partnership hires a property manager, and that property manager ends up being your S-Corp - great, now you are perhaps better managing your exposure to self-employment income as a result of these property management fees.  This is different than the carried interest.      

With those stats, you'll pull half the accountants in the forum out of the woodwork, most of us would be more than happy to work with someone in your financial position as it means we can provide a fair amount of value.

Whoever you work with, I would recommend you consider finding a firm with substantial experience to offer in both real estate, and estate/gift planning given your goals..  Given the size of the income you are working with in semi-retirement, one would assume that you do have substantial capital to work with, or at the very least can accumulate it fairly quickly, so on top of just real estate tax savings strategies, you would also likely benefit from a team who has subject matter experts in estate and gift planning.  Your journey is two part - accumulate more wealth, and then how you are going to move it onto your kids - both have substantial tax planning opportunities.

Given you mentioned your primary motivation is taxes, a HUGE caveat you should keep in mind is that no matter what real estate investment you make, first and foremost it should make good business sense.  Tax benefits should be #2 on the list.  Tax benefits can help make a better business deal, but a bad business deal is hardly ever going to break even just because of tax benefits.

The other big consideration you should have, in order to actually benefit from real estate fueled losses or credits, it will require a substantial investment of time - either to get over the material participation thresholds for short term rentals, or to get over the real estate professional thresholds for mid term /  traditional rentals.  The point here is - it isn't just buy some rentals and get a third party property manager, in order for you to get the direct tax benefits against your pension / W-2 income, you could readily be required to invest anywhere from 100-750 hours per year.  If you are looking for a new activity, perfect.  

If you aren't looking to invest that kind of time, then perhaps you can still benefit with the leveraged returns you receive through real estate investment as a passive investor that can be tax advantaged, but the related losses won't be able to offset W-2 / Pension / Retirement Distribution / Roth Conversions / Etc.

Another consideration - do your kids have an interest in real estate?  It happens so often (but not every time!) that an older generation spends years accumulating real estate, they pass away....and then the next generation just sells all of it immediately since they don't want to deal with it.  Still not a bad way to get some leveraged returns that you pass on to your kids, but ensure that you find enough value in it while you are putting all this work in.

Or, find a business partner who has money, but not time.  You bring the time and a little money, they bring the rest of the money, and you go out and make some deals.

You are giving up more of the upside, but it is getting you in on deals you otherwise couldn't have pursued.  Would rather have 30% of a $1m deal than 100% of no deal.