All Forum Posts by: Margaret Feit

I had a property that burned down in a wildfire last week. I will have an insurance payout, which I will use to rebuild. For tax purposes, here is my general understanding:

The land value on my books will be unchanged. The existing basis that I had in the building will be reduced to $0 as a loss (there's nothing left). Insurance money will essentially be "income" against this loss, bringing me to an overall gain. But this gain can be deferred for a couple of years while I rebuild. When the new building is complete, all the costs to build it will become my new basis, minus the gain deferred from the insurance payout. Does this all sound right so far?

Here is my question: There will be a number of costs incurred on the property during this reconstruction time that are normally deductions I can expense and are not specifically related to the rebuild. These would be things like property tax, mortgage interest (I'm keeping the existing loan on the property), insurance premiums, HOA fees, etc. Also items like travel and mileage costs to visit the property during the construction. Are these expenses deductible in the current year when they are incurred, even though the property is not presently listed to rent? Or do they all get wrapped into the basis of the new build, along with the construction costs, when it is complete?

One additional note is that a portion of my insurance payout will be designated as coverage for lost income. My understanding for tax purposes is that even if I actually use these funds to help cover construction costs, I need to claim this portion of the payout as income in the year it's received and pay tax on it accordingly, instead of including it in the deferred gain that goes toward my basis. Does the fact that I will have this income on the property during the reconstruction process have any bearing on whether or not I can deduct the types of expenses in the paragraph above?

Thanks for any knowledge or direction anyone has to offer. 

I am in the unfortunate position of having my TN short term rental property burned to the ground in a wildfire this week. I am planning to rebuild and hoping insurance will cover most of the costs, but I might see if I can supplement that payout with some of my own funds to build something nicer than what I had before. As I sort through the details, I'm trying to understand the ramifications on my finances and taxes of have my substantial rental income replaced by substantial building costs this year. 

In the case of a property that is a total loss, replaced by a new build that will probably not be finished in the same calendar year, how do I account for this in my books and on my taxes? Do I write off the whole thing as a loss (except for the land value) this year and start over with new cost basis when the new house is built? Or do I just keep depreciating from my existing cost basis for now and then adjust it somehow when the new build is finished? And how does insurance money play into it and get reported? It sounds like I will likely get most of the insurance money up front with a percentage reserved for when the project is completed. In addition, I should also be getting some insurance money for personal property and lost revenue. How do those amounts get reported for tax purposes?

This is my first time down this road, and there is so much to learn and figure out! Any assistance that can be offered in the process to help me get the accounting right would be greatly appreciated!

My husband and I own four STRs in Tennessee. We run them through a Tennessee LLC for accounting and management purposes, but we hold title in our own names. Even though the LLC doesn't actually own the properties, we are definitely doing business and making income in Tennessee, so we have been filing a business tax return with the STR income reported under the LLC. We applied for and received a FONCE exemption for the Franchise & Excise tax, so we haven't had to pay these taxes anyway.

This year we are planning to sell one of the properties for a substantial capital gain, which I understand does not fall under the "passive activity" definition for the TN F&E tax. If the property was actually owned by the LLC, then I know I would have to report the gain as non-passive income, which would make us ineligible for the FONCE exemption this year, triggering a massive tax not just on that gain, but also on the rest of our STR income for this year. But here is my question:

Because the property is not actually owned by the LLC, the LLC itself will not actually have any capital gain. The gain will be reported on my personal federal tax return in my own name. Can I just leave this sale & capital gain income off my business tax form and FONCE application for this year and only report the rental income? Or if I am submitting the rental income for a property that the LLC does not actually own, then do I also need to submit the capital gain on said property for business tax purposes?

And a follow-up question - should I even be filing business tax for this LLC in the first place, seeing as it doesn't actually own the properties I am running under it?

If properties titled in my name had originally been reported directly on my 1040, and then later I quit-claimed them into my LLC, in that case I would be expected to move them from the 1040 to the 1065, right? That seems like a fairly common step to take (though maybe it's usually done within the same tax year), so is there a correct way to do that on the tax returns, keeping the existing cost basis and depreciation history? And if so, then can it also be moved the other direction? I'm wondering if I could move them onto the proper return moving forward as if I had quit-claimed from the LLC to my own name during the year.

Having asked that question, though, as stated by @Michael Plaks, it makes perfect sense that maybe official suggestions for my situation can't be put on record on a public forum! As several here have advised, I will work on hiring an accountant to discuss my potential options!

@David M.

Thank you for your insightful response. From an accounting perspective, the books are actually pretty straightforward. The business bank account pays for everything related to the properties, including the taxes, mortgage payments, etc., and records them as business expenses. All income goes straight into the business accounts as well. From a books perspective, the properties are completely run by the LLC. If the titles were in the name of the LLC, everything would be clean and straightforward. So the mixup is more on the legal front, if anything were to come up with title issues or lawsuits, etc. Then we would probably have a mess to deal with.

When we first started out, we were told that we should put all the properties in an LLC for liability protection, and when we started needing mortgages, we were told it would be easy to just quit claim to the LLC after we got the mortgage. So that's how we set it up. But then it got dicey when we did our first cash-out refinance for a property that was actually owned by the business and had to be quit-claimed over to ourselves in order to get the mortgage. And then another issue when we sold a property that had been quit-claimed that turned out to have some title mess in its history, and the title insurance wouldn't cover us because of the quit claim. (Fortunately the original closing attorney stepped in to cover it since they missed it at closing.) After that we stopped quit claiming and just left all the mortgaged properties in our own names. But by that time we were already recording all the properties on the partnership tax return. If I could set it all up differently, I would skip the LLC altogether and just put everything in our own names with a big umbrella liability policy.

Your thoughts about it maybe not making a difference on taxes when we sell because the information from the K1 would flow through to the same place on the 1040 is helpful. I know that is not the "correct" way to do it, but would be in line with the way I am already doing things anyway, and would certainly be simplest. I will have to look more carefully at how the income shows up on the 1040 if it comes through the K1 vs directly onto the 1040. My concern is just if the IRS gets a 1099-S from the closing attorney with a big capital gain that doesn't look like it's listed on our 1040. 

As you said, it is certainly not worth the IRS's time to come after us on this. We're not avoiding any taxes by doing this way. Whether we file it on the 1065 that flows through to us or just on the 1040, either way we are personally paying the same taxes. We're just filing it on the wrong forms. But just because it's not actually worth their time doesn't mean they won't question it if they can't figure out what we were doing at a glance!

Obviously I need some expert assistance as I figure out the best practice moving forward, starting from where I am at now. I appreciate the names who have been recommended to help me sort this out!

I am in Georgia. LLC is registered in Georgia. Properties are in Georgia and Tennessee.

My husband and I have an LLC with a 50% split in ownership, taxed as a partnership. We own several rental properties, which we run through this LLC. We have separate business bank accounts and credit cards and run all operations of the properties through these business accounts and keep excellent records in Quickbooks, completely separate from our own finances. We file a 1065 that includes all our properties, and all the income flows through to our joint return via the K1.

The trick is that due to the requirements of mortgages, several of the properties are not actually titled to the LLC, but to either my husband or myself or both of us jointly. I'm sure what I ought to have done all along was file the properties titled to the LLC on the 1065 and the ones titled in our names on our own schedule E, but so far I have been doing it all on the 1065, since that's actually how the business is run. It doesn't make any difference in tax owed, since it all flows through to our joint 1040 anyway.

We are anticipating selling one or more of these properties within the next year or two, and I realize that in the year we sell, the gain from sale is going to be reported to the IRS under our personal names, even though the property purchase and ownership has been reported on our 1065. Seems like that would raise some audit flags, since it would appear at a glance that we have a substantial personal gain that we aren't reporting on our 1040 (even though in fact we would be reporting it on the 1065, which would flow through to the 1040). 

I'm trying to determine the best course of action as we plan for sale(s) in the next year or two, and would appreciate any insights. 

1. I could jump through the hoops of amending every 1065 and 1040 since we started buying properties (7 years, I think). At this point it doesn't seem worthwhile to bother with that, since it doesn't actually change anything in taxes owed or paid. 

2. In the year we sell, we might be able to do a quit claim to the LLC just before selling so that the paperwork from the sale shows the LLC as the seller. This would probably complicate the closing process and mortgage payoff, especially if there ended up being any title issues that would now not be covered by title insurance, but it would make the tax return straightforward. We still would be filing incorrectly for our other properties moving forward, though.

3. Can I somehow move the affected properties to our 1040 beginning with our 2021 return so that they are reported under the proper ownership moving forward? If so, I assume I would enter them on the 1040 with the original purchase date and basis and indicate the depreciation already claimed. What would I need to do to remove them from the 1065? Would doing this raise red flags with the IRS?

4. It might be possible to change the MMLLC into a SMLLC, with one of us leaving the partnership and giving our stake in the company to the other. That would eliminate the need for the 1065 and make it so that everything gets reported on our 1040 anyway. In the long run that might be what we end up doing in order to simplify everything, but it seems like a lot of hoops to jump through both from a business structure perspective with the state and from an IRS perspective.

At this point I don't see the LLC structure offering us much protection, since many of our properties are titled in our personal names anyway, and tenants/guests are just as likely to sue us personally as to sue the owner of the property. In spite of my attempts at keeping everything separate in practice, from a legal standpoint I imagine the corporate veil would be pretty easy to pierce at this point! Since we have/need personal mortgages, it seems better to just keep things in our names and have a lot of liability insurance. I also am not concerned with who owns what between my husband and myself or whether there is an equal split of assets and liabilities. I just want to get us into a situation where I am filing correctly and keeping our tax & legal paperwork as simple as possible.

Does anyone have recommendations of the simplest and/or best practice path to take at this point? Either one of the options above or something else I haven't thought of? I appreciate your insights!

@Michael Plaks

Thank you so much for taking the time to answer thoroughly - this is very helpful and answers my question. 

I find that most tax advice I read tends toward maximizing depreciation in the short term, perhaps generally assuming that the reader is in the highest tax bracket and will be for the foreseeable future, so the time value of the money is the biggest consideration. For those of us who move between tax brackets from year to year depending on our real estate activity, it sounds like the actual best practice may be more nuanced than just always claiming the biggest current year deduction possible. Thinking of depreciation as a loan instead of a tax cut helps me think through the tax planning process in a simplified way. Thanks!

Hi All, 

I'm trying to wrap my head around planning for capital gains and depreciation recapture if I start to sell some appreciated property within the next few years. I'm also trying to determine whether to take accelerated depreciation when it's available to me, and what the longer-term ramifications might be. For the moment I am leaving 1031 considerations out of this.

Suppose this year I purchase a hot tub for my rental property for $5000. As personal property and not actually part of the house, I believe I can take accelerated depreciation for it this year to write off the entire cost. If I then sell the property next year for an overall gain, and the hot tub is transferred with the property but not listed separately on the sales contract, how would I record the sale of the hot tub for tax purposes? Do I have to list it as sold for its original purchase price or a reasonable current value (say $4000) and decrease the overall reported sale of the rest of the property accordingly? If so, that would trigger depreciation recapture on the hot tub, which seems like it would essentially wipe out any benefit I had from taking accelerated depreciation, right? And with a good chance that I could be in a higher tax bracket in the year that I sell, it seems like I could actually lose money by taking the accelerated depreciation.

Alternatively, could I write it off as sold for $0 (or essentially given away), since it wasn't listed in the contract, and the buyer will not likely be categorizing it as a separate item on their end? In that case, I would end up with a slightly higher capital gain on the property overall but no depreciation recapture on the hot tub, right? That seems like a win, but is maybe not allowed. 

While I know you can't give binding legal advise on a forum, can someone clarify for me how this sort of thing is typically done and what is generally accepted by the IRS?

I have a new SDIRA that invested in 2020 into a real estate syndication partnership.  I do most of my own taxes, but this is my first year with self-directed retirement accounts, and I don't have a clear understanding of the filing requirement and forms.

Because the investment I made was into a real estate syndication, there is debt financing involved. I know when the property sells and there is gain to report, I will have to file 990-T and pay UDFI on the gain. But for 2020, the K1 I received shows only a loss on line 2 due to depreciation.

Here are my questions:

1. Am I (or rather was I, since the April 15 deadline is already passed) required to file a 990-T for 2020 when my K1 showed an overall loss?

2. If I am not required to do so, should I anyway? Does that give me a loss that I can carry forward against the gain I will have when the property is sold? 

3. I probably need to get a CPA to help me with this since I'm not clear on the requirements and details. But this is a pretty small investment, and paying a substantial CPA filing fee could wipe out any potential gain I get from this investment and then some! Does anyone have a recommendation for a CPA that is familiar with SDIRAs and UDFI filing that might be able to help me out without costing me an arm and a leg?