All Forum Posts by: Kory Reynolds

@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.

I would be wary of "just put your logo on it".  There was case relatively recently where one took it to the extreme with a watch purchase, and put their company name on the band - deduction was denied.  Also...in example, spending $20 to put your logo on a pair of $60 pants - even if you get the tax deduction, you likely would have had more money in your pocket to just wear normal pants without a logo.

As noted - clothing should not be suitable for everyday wear in order to be a tax deduction.  Generally this ends up being allowed deductions for specialized or safety equipment.  Medical scrubs / doctor's coat / safety vest / specialized footwear or other safety related gear.  In the past there have been fitness instructors denied a deduction for their fitness clothing - while for a purpose, it is also suitable for everyday where.  Within reason one could include items branded for business marketing.  Going back to ordinary and necessary - if you own just one or two properties and spend thousands on your clothing with your logo on it - may be a bit of a stretch!

I would be VERY careful about doing any direct real estate investing with a retirement account.  Yes it is possible, but there are so many land minds to step up, and the penalties so severe, it almost isn't worth it.  Real estate is already relatively tax advantaged anyways.

The prohibited transaction rules can be quite onerous - even some sweat equity on the property can trigger problems for you. Then if you end up doing a self directed IRA instead of a Solo 401k from not having any self employment income, you are subject to UBIT rules, which can cost you thousands in fee annually just for the filing depending on the complexity - in addition to the tax owed. If it is a normal 70/30 leveraged property, you may end up subject to tax on 70% of your returns anyways - so cost benefit, is that 30% tax free portion worth the high tax rates paid and additional filing fees to get tax free treatment on the 30%?

Investing in syndications, passively with an unrelated party (beware of UBIT if an IRA on both of those), or just hard money loans to third parties are all great ways to invest in real estate with a retirement account to minimize as many headaches as possible.

1) Consider qualified accounts - HSA and Retirement.  Low hanging fruit.  If your PM doesn't already have a retirement plan, there are credits right now against the costs of setting one up and training.  Bonus...you may be able to structure a 401(k) plan that provides a higher match for certain classes of employees.  Contributions to a 401(k) top out at a whopping $69k for 2024.

2) If you would be materially participating in the Rental Operations of a rental property, consider acquiring rental properties and performing cost segregation.  All a timing benefit, but does provide some short term relief to free up capital to continue to invest.  Or consider short term rentals - still requires material participation, but may be easier to hit the material participation thresholds if you self-manage.  In the end this cost segregation approach is only a Timing difference - you pay less tax now, you pay more tax later.

3) Consider if an S-Corporation makes sense.  IE, is there already enough W-2 wages without paying yourself a W-2 wages to support your entire available 199A deduction?  If not, it is worth exploring an S-Corp, which would partially shield you from some self employment taxes while also providing a greater base of wages to take a 199A deduction. 199A might go away in 2026, so maybe don't make any radical moves just for the next 2 years unless the tax savings will be substantial.  Whatever you do...don't buy rental properties within this S-Corporation.

4) Are the states you are operating in have an available PTE? In which case, take advantage of those, or restructure so you re able to.

5) Consider charitable giving, if that is a part of your goals

6) Consider what equipment and other purchases your business actually needs and purchase those to continue growing the business.  Don't buy stuff you don't need just to lower your tax burden.

7) Don't worry about it too much - accept the fact that in order to have a big tax bill...it means you (typically) had to make a bunch of money.  Make the small tweaks as you need to so you aren't unnecessarily paying too much, but I wouldn't radically change your business or where you are spending your attention just due to taxes. If you can make more money by focusing on building your Property Management business than if you spent the same hours in a rental property...spend the time where you are going to make more money, even if it does mean a higher tax bill.

8) Go talk to someone who can spend the time getting to know what is going on with you and provide some customized advice.  Everything above is relatively boilerplate advice.

DIY will be the "cheapest" - you can set up an account on the MA DOR website, register your LLC, you pay over the whopping $500 MA charges you to register an LLC, and voila, you are off to the races. You then file the annual report each year and continue to fork over another $500 annually.

Next "cheapest" will be legal zoom or a similar service, I believe they'll help roll the registration with the state into the start up package.

I use "cheapest" in quotes - the primary purpose of an LLC is typically to provide some level of asset protection. If you are interested in this being a real level of asset protection, with someone to support you in setting it up the way that will accomplish your goals, hire an attorney. It could very well be the route that is "cheapest" now, ends up being substantially more expensive down the road.

If the costs above are not worth it to you...maybe pass on the LLC and get yourself a good insurance policy, and maybe an umbrella policy personally.

"significantly offset" is a generous description.  You can use up to $25k a year of those passive activity losses if you are actively participating in your real estate ventures ("small landlord" exception) and income stays under $100k a year.

So yes it can be useful if someone happens to fall under these circumstances, but for anyone who is going to have over $100k a year of retirement / other sourced income, they may be out of luck.

It's all timing - you are just using up those PAL earlier than if you waited for the rentals to start producing taxable income (they normally do if it is a good investment), or a property is sold and PAL are released to offset that income.  Instead you are using up some of it earlier against the Roth Conversion / your other sources of retirement income.

"It depends".

Pricing is all over the place for accounting firms.  Personally, based on the demand for CPA services in my area with any level of specialty, $750 is fairly low.  Many accounting firms around here (New Hampshire) start at $1,500 - $2,000 no matter how simple the situation is.  Some start much higher than that.

In our area it is simple supply and demand - there is a very large demand for our services, there is limited capacity to provide services.  Similar on the employee side...there is a very high demand for employees, and a relatively small supply of those willing to do the work.  Combine the two - we get high fees.  Our area is not unique, this is a nationwide issue (opportunity) for accounting firms.

In the end I think many would be well served to think of their CPA/EA as they do an attorney - while they can also help provide planning advice to better structure your tax life and save some money, a portion of the cost is just a cost of doing business - you are required to be compliant by the Feds / states / etc, and the CPA/EA is insurance to ensure you get it right and stay out of their way.

Getting help from a TAS has definitely helped us in the past on addressing something like the IRS seeming to lose a payment and being unwilling to put the effort into finding it - nothing technically complex about your problem from what you are saying (just a lost payment), but if they aren't helping you, the TAS helps light a fire under them.  Taxpayer Advocate Services are a taxpayer funded group that are supposed to be the "watchdog" that helps taxpayers deal with these types of issues with the IRS.  Not necessarily a fast process, but I have yet to have something through them not be resolved properly.

https://www.taxpayeradvocate.irs.gov/

Unless you provide substantial service (more hotel/motel like), the short term rental should be reported on Schedule E.  But you can still treat it as resulting in Ordinary Income even though it is reported on Schedule E, which lets you properly report in accordance with the tax results it seems you are shooting for under the tax return loophole.

If your CPA is looking at switching it between schedules to get that tax result...it sounds like they don't understand the reporting position fully and/or they just don't know how to use their own software to address it.

In summary, based on what you are describing for the situation, it should go on Schedule E, with what sounds like the resulting refund of $17k.

The rental use alone won't create a position, but it isn't a bad additional fact to have. But you better make sure all your ducks are in a row, all your facts, all your documentation, everything supports that your original intention from planning, acquisition, renovation, when and how you started marketing it for sale, etc, your history of other investments - your proformas, your e-mail correspondence, etc, all pointed towards that this was an investment / business use property and not a flip.   The IRS still doesn't like "short term" 1031s, with good reason - you need to ensure that you can 100% support that it was not a flip.

This was not uncommon during 2020-2022 when prices were increasing at an incredible rate, I did have a few clients where they acquired a property that was truly intended to be a rental property, had a long history of buy / renovate / hold rentals, and then the market just blew up so fast that it changed the investment analysis for that property, or in several cases they actually just received unsolicited offers that they couldn't refuse.  Having actual rental use can support the position, but renting it for a few months for the sake of creating a position, and that the only reason you are doing it is for tax purposes, I wouldn't consider that to be valid rental time for purposes of trying to prove it was always held for investment use. Holding it for another few months also won't necessarily get you there either if it was actually a flip, but you are just trying to make it look better for tax purposes.

Summary point being - it can be a valid tax position to have a short term gain / property held for less than 2 years rolled into a 1031.  But you better make sure all your support is buttoned down tight.  Don't try and invent your facts afterwards, be very honest with yourself (and your CPA) on what your intent was from the get go and how that is supported.