All Forum Posts by: Michael Plaks

Combined W2 income of $300,000 should generate more than $40,000 in taxes, especially with state taxes added. You're looking at some wrong number to measure your tax burden.

Losses do not offset taxes, they offset taxable income. So if you really have a $60,000 loss, you would be paying taxes on $240,000 of income instead of $300,000. That may lower your tax bill by maybe 20,000.

If you don't trust your tax consultant and need to double-check their opinion, maybe you need a different tax consultant. 

That said, your consultant is correct. You get to claim whatever is the larger amount - a "standard deduction" of $29,200 for a couple - or a sum of all allowed "itemized deductions."  Medical bills are one of those itemized deductions, and you will not be able to beat $29,200 without a mortgage. You get a BETTER deal this way.

The reason you have to pay the IRS is almost certainly because you don't take enough taxes out of your paychecks. But this is for your tax consultant to explain.

I will make a risky guess. Are you approaching this retiree suggesting they fund your project and trying to reassure them they won't have a tax burden? If so, I recommend not doing it, for ethical and liability reasons. The correct approach is to tell this person to consult their own tax advisor.

That said - you're describing a lender charging interest on a loan. The interest will be taxed at their ordinary rate, not capital gains rate. However they may have a very small impact or even no impact on their taxes, depending on their overall tax situation. 

Also, need to be aware of the local usury limitations on interest.

@Natalie Kolodij already confirmed that this is a correct result. Here is a long and technical post if you're interested to understand how these investments work for taxes:
https://www.biggerpockets.com/forums/51-tax-legal-issues-con...

Interesting. I believe that this is a recently added option, I don't think it existed in the past. I would certainly keep the existing EIN. But - as you pointed out - my information may be incomplete or outdated.

Your wife owns a consulting business. What does she consult people on? Do they really need her consulting? Or can they continue to proceed without her help?

Because accountants are very similar to consultants. We provide some value, but people can also do without us. How much value? That depends of course, and here is a long post discussing this concept:
https://www.biggerpockets.com/forums/51/topics/1088325-expla...

You cannot amend. And not only because the window to amend returns closes after 3 years, but because such amendment is specifically prohibited after 2 years of incorrect depreciation.

Correcting depreciation IS a "change of accounting method" so form 3115 is the proper way to do it. Technically speaking. But not practically speaking.

The catch is that Form 3115 normally produces an adjustment which either increases or decreases your current taxes. In your particular situation, this adjustment will only change carryforward PAL (passive activity loss) but not current taxable income. Under these circumstances, Form 3115 is likely to not be processable by the IRS even if you file it. 

If you skip Form 3115 and simply adjust your PAL numbers, you will achieve the correct ultimate outcome and save yourself a major hassle.

Here is a detailed description of your tax situation:

https://www.biggerpockets.com/forums/51-tax-legal-issues-con... 

This issue has been repeatedly discussed on the forum, but investors, especially new ones, are still confused.

Let's go through it one more time, but I will start with the end: your self-directed retirement accounts should obtain their own EINs as a trust.

1. Each taxpayer needs to have a tax ID, and there're three main kinds: SSNs for persons who are permanent residents or citizens, ITINs for non-residents and EINs for businesses/employers.

2. A self-employed person or an investor often IS an employer. Hiring contractors means being an employer, and such an employer has tax responsibilities, including issuing 1099s. One can issue 1099s using their personal SSN. While it's not breaking any rules, it is a potential privacy/security issue, albeit SSNs are no longer safe these days anyway. 

3. If a person is an employer, they can obtain an EIN which is basically a substitute for the owner's SSN. Now, instead of issuing 1099s from your personal SSN, you can issue them from your personal EIN. Nothing changes except the recipients (contractors) do not see your SSN. 

4. Likewise, you can use this personal EIN instead of your SSN for any other tax-related purpose, for example give it to businesses who are supposed to report your income on 1099s or K-1s.

5. Many investors operate their business as a single-member LLC which is disregarded for tax purposes. In other words, it is NOT treated as a separate taxpayer. Instead, it's treated the same as if there was no LLC. Such single-member LLCs should also obtain an EIN, and it will be linked to an owner's SSN. Whatever taxable income is linked to this EIN is actually applied to the underlying SSN.

6. Each person can only have one EIN linked to their SSN, even if they run multiple businesses. Side note: DOGE reportedly discovered that the reality was different, but at least this is how it was supposed to work.

7. If a business is a separate taxpayer, it needs its own EIN which is NOT linked to any SSN. All corporations, C- and S-, all partnerships and many trusts are in this category.

8. A retirement account is a trust. Conventional retirement accounts invest in mutual funds, stocks and bonds. This income is typically not subject to taxes or IRS reporting, so EINs are not needed. 

9. However, this is not the case for self-directed retirement accounts involved in real estate. We have many common situations where these accounts can be involved in IRS reporting:
- hiring contractors who need 1099-NECs issued from your SDIRA
- private lending when your SDIRA receives interest reportable on 1099-INT
- selling properties reportable on 1099-S
- investing in syndications reportable on K1s
- SDIRA required reporting for UBIT on 990-T
- and more

In all the above cases, your self-directed retirement account needs to obtain its own EIN as a trust. It's free and instant on the IRS website. 

Example: the syndication where you invested via your SDIRA sold a property, and there are capital gains. This income will be linked to the tax ID of the passive investor. The investor is your SDIRA, and the tax ID should be its unique EIN - as a trust - which is NOT linked to your SSN. If it happens to be linked to your personal SSN, then YOU owe taxes on this capital gain, defeating the purpose of using a self-directed retirement account.

So we want to fund a soloK with $23,500. Sure, why not. We need $23,500 of net income, meaning after all deductions. Even if there is no other deductions, we at least have to pay for tax return preparation and payroll service, and there is no way it's under $1,500.

We need at least $25,000 gross management income. Typical property management fee is 10% of rent. So we're talking about $250,000 gross rental income.

Keep these numbers in mind. Then add all the other costs, including setting this structure up.

And, by the way, if this corporation does nothing other than converting rental income into a property owner's salary, its legitimacy as a business entity might be doubtful.

No, I'm not against the idea. I'm simply suggesting a careful consideration of pros and cons.