All Forum Posts by: Kory Reynolds

 Just start!  We aren't doing 100% up front, but just recently started charging a retainer and have had zero pushback.  We also strive to bill monthly as work is performed, rather than waiting until a tax return is 100% complete - especially for those that go out on extension - and again I receive (almost ;)) no pushback on that.

I don't think I would advise anyone do something or not do something because it might be a "red flag" - yes the IRS has plenty of red flags, but the audit rate on most of these issues is so comically low, that as long as you have a legitimate position - take it, don't not do it just because it might slightly increase your chances of an audit.  I have heard people say similar things about the home office deduction, or vehicle expenses - if it's valid, I'll take it every time.  That said, no CPA worth their salt would take a wrong position just because they think the chances of it being audited are slim.

Interesting nugget - the IRS even has a form for disclosing to them in the event that you think you are taking a position that is contrary to IRS guidance - Form 8275 - and if you validly disclose your position on this form you can avoid penalties if the position is overturned.  The standard of needing to file this form...isn't at least "more likely than not" (50/50) it would be overturned, and position has a "reasonable basis"  - which is interpreted as greater than a 10% chance of success of being upheld in a challenge.  10%!!!!  And....The IRS still only looks at a small fraction of these.  There are a pair of attorneys on the CPE circuit that always talk about these, and talk about in all their years of being involved with these...only a couple have ever been selected for audit.

Generally if you only have a handful of rentals and you are fulltime doing something else (a W-2 job), it'll just make sense to claim the standard mileage deduction - @David Orr did a good job outlining all the related nuance to that.  

With 179 you are going to be limited based on your percentage of business use with the vehicle (so still need to track mileage), and if you go under 50% business use you can end up with a recapture of your prior 179 deduction - income with no related cash flow is always a bit uncomfortable!

I am local to you, but I am one of those that @Account Closed mentions that does tend to work with larger investors so you wouldn't be a good fit for us - so I'm not self promoting.  But if you want to reach out there is the names of a couple local smaller firms that I tend to refer business to (there are absolutely no kickbacks to me - I just want to help people out) that aren't a good fit for us.  That said, there is almost no one in NH in the CPA/EA world at a small firm that I am aware of that focuses most of their time in real estate - perhaps very competent in the issues, but not anywhere near the concentration in the real estate world that you'll find from the professionals you could reach out to on this forum - you really can't go wrong.

It doesn't hurt to find someone with local experience in your case if you are able to find a firm that is a good fit and vice versa - the NH Business Tax can be messy - but just about anyone on this forum can help you deal with the other tax issues, and are smart enough to figure out the NH issues with some research or by phoning a friend.

You do have a unique situation where the property itself has been rented already (the 4 unit as a whole), so generally you don't get to track and place the single unit into service on it's own.  Additionally you don't get ST rental treatment on that single unit alone - instead one needs to consider the treatment for the entire building.

In your case doing a cost seg study would go back to the day the 4 family was placed in service - whenever you started renting the other 3 units.  Any bonus depreciation catch up through the Form 3115 would include an exclusion over all these years for the personal use piece of the building (your unit).  You wouldn't get any benefit for this 4th unit now being a ST Rental.

In short, doing a cost seg study on the building may accelerate some depreciation, not end up with a ST rental benefit, and also end up with significantly more disallowed depreciation on the personal rental unit.  Perhaps it is going to be worth it, but you won't be able to truly benefit from the short term rental "loophole" in your use case.

Side note - I could swear we've met before - do you attend NHREIA meetings?  I'll be headed there tomorrow (5/8) evening.

 It depends ;)

We discussed it for each client that would have bonus depreciation, and generally it fell into a few different camps:

1) We always extend anyways, so we don't care if we wait

2) We normally file on time, and the amount of bonus depreciation difference is relatively immaterial, so let's not waste time and fees to extend and have to provide estimates to members - typically this was with less than a few hundred thousand of bonus

3) We have too many investors, we aren't going to delay them, we'll file with the 80%

4) The bonus depreciation is material enough to us that it is worth it to us to wait. This was actually the great minority.

I also disagree with Michael, due to some language in the annual revenue procedures that discusses what we can do with depreciation changes.  This falls under section 6.01 of that revenue procedures each year, the most recently applicable would be Rev Proc 2024-23, but the same language has been floating around in this annual Rev Proc for closing in on 10 years - note there are various caveats so this isn't a blanket statement on all changes related to depreciation expense changing in the second year.

Before this, the mindset has been that one was required to amend, given except for this language, per the IRS one has only adopted an accounting method if they have used that method for at least 2 years.  Thus if you have only filed 1 tax return, you haven't adopted a method yet, since it hasn't been two years - so your only option was to amend the first year. This rule still does apply for just about every other type of change in accounting method outside of changing from an impermissible depreciation method, to a permissible one - this carve out only applies to depreciation.   Even with this carve out available, it does plainly state that a taxpayer does still have the option to go back and amend the prior year return - so both answers can be correct.

I would have your CPA/EA review your situation and the related Revenue Procedure to verify you are under this section, which would allow filing of the 3115 instead of amending the prior year return.  There may be some carveouts related to moving from non depreciable property to depreciable property in certain circumstances that may not fall under this accounting method change, but it has been some time since I have had to deal with that piece.

(b) Taxpayer has not adopted a method of accounting for the item of property. If a taxpayer does not satisfy section 6.01(1)(a)(i) of this revenue procedure for an item of depreciable or amortizable property because this item of property is placed in service by the taxpayer in the taxable year immediately preceding the year of change (“1-year depreciable property”), the taxpayer may change from the impermissible method of determining depreciation to the permissible method of determining depreciation for the 1-year depreciable property by filing a Form 3115 for this change, provided the § 481(a) adjustment reported on the Form 3115 includes the amount of any adjustment that is attributable to all property (including the 1-year depreciable property) subject to the Form 3115. Alternatively, the taxpayer may change from the impermissible method of determining depreciation to the permissible method of determining depreciation for a 1-year depreciable property by filing an amended federal income tax return, or an administrative adjustment request under § 6227 (AAR), as applicable, for the property’s placed-in-service year prior to the date the taxpayer files its federal income tax return for the taxable year succeeding the placed-in-service year.

 I do agree - if you follow the rules, you'll be fine.  And good on you - it sounds like you have done more to educate yourself and go about things the right way than most (by far).  The problem is, the great majority people don't bother to educate themselves on it and just go for it.  Each year I have a handful of new or prospective clients come to us that have done some real estate investing with their qualified accounts, and in literally every single case they were doing things wrong without being aware (or just pretending to us they didn't know) that they were not following the rules - prohibited transactions and/or not addressing UBIT reporting.  Certainly those out there doing it right (I still have a couple of clients that are), but it does seem to be in the minority.

What are you getting at here? As in some loophole that allows investment in real property through a tax exempt entity?   Anyone who contributes money here does exactly that - makes a charitable contribution and gets no money in return.  If they are receiving something in return, it isn't a charitable contribution.  

You don't need to start a 501(c)(3) to start investing in real estate and rent them out at FMV to first responders. If the rents end up being taxable in the organization, they'll actually be subject to maximum income tax rates very quickly - much faster than if you just did this personally.

There are groups now starting with "socially responsible" investing - effectively a standard partnership/syndicate that is "investing for good" - that would likely be a better structure to avoid 501(c)(3) headaches in a for profit venture.  

I don't think too many donors would be excited to start donating to a non profit if they find out the target audience is still paying FMV rent, and the person running the organization is collecting FMV management fees in his own pocket. The question at that point is what are you really providing to the community that would attract donors?

There are two different issues at play - the titling and ownership of everything is more of a legal liability issue.

It is possible to still have a tax partnership just with execution of a JV agreement, even if there is no formal LLC in place. Assuming this is proper in your situation, with treatment of a tax partnership, reporting would be as such with a Form 1065 filed, claiming all rental income and expenses, and then issuance of a K-1. You would need to get an EIN for this JV as well and give it a name. As not register with the state, I have seen clients (but you can consult with an attorney on this) go with something like "Alicia and Bob Et Al Joint Venture" as the name for the IRS EIN. Given you aren't clearly a prorata split of everything (IE both names on title, mortgage, etc), Partnership treatment would be much more supportable than as a TIC.

If you have an agreement in your JV that you are sharing the expenses and revenue of the venture, the JV certainly gets to claim those valid expenses, including the mortgage interest.

If the property was never in service and was being renovated, that interest may not have been deductible anyways and it is possible it could have been required to capitalize it into the renovation, in which case you'll recapture it by your share of depreciation.

@Chris Seveney I agree that (phone calls and letters) is the first step, and in 98% of cases, it can be resolved that way, and there is not a need to involve TAS - that would just make it take longer.  That said, it sounds like the OP and their team have already been trying for months with many hours on the phone trying to resolve the issue the old fashioned way, and they aren't getting anywhere. When you reach that point and don't know what else to do, TAS can be a great resource to help get the problem resolved.

I haven't used TAS to address a misapplication of a payment, but depending on what error was made, I could certainly see that being a resource.  The times we have had clients utilize TAS over the last few years was primarily COVID relief related, where involving TAS helped get an issue resolved very quickly.