All Forum Posts by: Michael Plaks

@Bill B.

Nothing to correct, you got it.

Here is another way to say it:

1. If it has always been your primary, and you sell right away - full exclusion (up to the limit of $250k single or $500k couple)

2. If it has always been your primary, you have 3 years to rent it after you move out, and your full exclusion remains valid. The only gotcha is returning depreciation taken over those 3 years.

3. But if you move back - then you have to deal with pro-ration.

4. And if you missed your 3-year window after moving out, you're SOL.

*of course there're some conditions and exceptions for the above general rules

Quote from @Donna Johnson:

I have an accepted offer in Ohio, and just now considering tax implications (although I have always expected to pay them). I do not plan to put the property in an LLC. What does this mean for my taxes in OH? This is my only rental property so far, although I own my personal home out-right in UT (no mortgage). Any tips for good accountants familiar with OH real estate law?

I'll cut it short if I may: you do not need an LLC for taxes, especially not for rentals. The only reason to create an LLC would be legal protection, and even that is very debatable, however I'm not an attorney.

As for finding an accountant - you're in the right place. Here is more:
https://www.biggerpockets.com/forums/51/topics/1222774-expla...

Ohio situation is a little tricky. If you have a mortgage on that property, you will likely show  a tax loss after including depreciation. Technically, it means that you do not have to file an Ohio state non-resident tax return. 

However, many tax professionals believe that you still DO need to file this return in order to preserve your losses for future use when you eventually sell this rental.

Your worse problem is California, not Ohio. Even though your property is in Ohio, you will need to file a California LLC tax return and pay your greedy state $800 each and every year.

Quote from @Henry Clark:

I wouldn’t do it.  

1. At some point he will want to or should want it just to be him. He should want to keep the same LLC so he has the history behind it.

4.  To me it is better for him to do a consulting agreement with you.  If he wants you to share.  Taxes will be higher for you but less risk.  

Thumbs up to Henry. Very rarely does someone bring common sense into these discussions.

But I agree 100%. Partnerships, and particularly inter-family partnerships sound like a great and simple idea. At first. Then life happens, and you have a very tense Thanksgiving table. 

I would also recommend consulting over partnering.

Quote from @Guillaume Vidallet:

Thank you everyone for your valuable insight.  My business/legal adviser recommended this.  I have a form 8832 but it was submitted to be effective on 01/01/25.  The form allows you to elect to be classified as an association taxable or disregarded as a separate entity so i provided my SSN.  It is member managed and to provide  asset protection and provided anonymity down the road in case of potential lawsuits from previous fix and flips. Any additional feedback would be greatly appreciated.  

Your "business/legal adviser" apparently is not a tax adviser.

Two parts in the process that you went through:
1. Form an LLC
2. Elect for that LLC to be taxed as a corporation

Legal benefits (if any) come from Step 1. But I'm not an attorney so I cannot give legal advice.

You then took an optional Step 2 which did not change your legal benefits, only changed your taxation. And, most likely, changed it for the worse. 

Discuss this Step 2 with a TAX adviser before too late. You might need to reverse it.

Also, there are two types of corporations, C and S, and you may be mistaken as far as which one you chose. It matters, and it matters a whole lot.

Quote from @Chris Seveney:

 So if I understand all of this, the only way to unlock prior passive losses is with future passive gains. Is there ever an instance where prior passive losses can be used outside of passive gains if you are a REP. For example, lets say I invested in something and it had $100k in passive losses. That entity then gets closed out. Do those passive losses even if entity is closed just sit there until you have passive gains?

When your passive activity is completely disposed of, its passive losses are unlocked.

Quote from @Sachin S.:

Thanks, Michael for offering to help the community for free, appreciate your time. Best advice in life are "free" , when made with good intentions. :) (Surgeons or Tax Advisors, profession no matter)

I must add that a lot of messes have been made with perfectly good intentions  ;) 

You can fact-check it at the nearest courthouse.

Quote from @Sachin S.:

Thank you @Michael Plaks for the prompt response. A follow-up question: If I get the cost-segregation study done in year 2025, will that help ? (provided my spouse also get REPS in 2025)?

You're asking an accountant. Our standard answer to almost any tax question is "maybe, it depends." Which is true in your case.

Quote from @Teri-Ann Pi:

I will never forgive you for this Michael, 

I'm not looking for forgiveness. And women never forgive anyway.  ;)  

If you prefer to disregard my professional advice, be my guest. But if you want to understand the concept of "non-qualified use" in the context of Section 121 exclusion, there's a mountain of information online, including this Bigger Pockets forum. You can search the forum for prior discussions of this tricky concepts. Yes, there IS pro-ration.

Also, if you convert your property to a multi-unit condo, you will lose the right to apply your exclusion to the parcels partitioned out. It does not mean that you should avoid it out of tax considerations. Business comes first, taxes a distant second or third.

Quote from @Sachin S.:

I came across this link: https://semiretiredmd.com/primer-real-estate-professional/  where they say the answer is NO, I just want to validate my understanding, quoting relevant section from that link:

---------------------

"We often get the question – can you claim these suspended passive losses during a year you become a real estate professional? The answer is “no.” The reason is that these suspended losses are passive and they can never offset non-passive income like income from your clinical job, only passive income.

So it makes sense to be strategic and time your losses so they coincide with the year you become a real estate professional."

The answer is indeed NO. REPS does not unlock prior passive losses.

If you qualify for REPS in 2025, your 2024 passive losses from cost segregation remain passive and locked.

You have to time cost segregation strategically. Details on how to do it are case-by-case.