All Forum Posts by: Michael Plaks

@David Pope

You probably inherited a 5.6% interest in a partnership which owns the property, as opposed to having a direct 5.6% ownership of the property. In this case, correct, 1031 exchange is not available. 1031 exchange is property for property, and an interest in a partnership normally is not (with a few rare exceptions, so you may want someone knowledgeable to give you a second opinion for your particular situation, which requires reading your inheritance documents.)

Whether or not you have any mitigation strategies totally depends on your specific situation and requires a one-on-one. 

It's like asking whether you can lose weight if you don't exercise. Everybody is doing something different, and it does not mean it works for another person.

Here is my Cliff Notes on this elaborate example:

If you have unused losses from the past, they might significantly soften the tax blow from a profitable sale.

I don't see how this is called "strategic play" or "premium lemonade." More like a 101 of taxation: you had a reserve of losses -> it helps when you have profits.

And a tax geek addendum:
I also do not see a direct link to cost segregation benefits here. Maybe you implied the underlying conversion of 1245 recapture into 1250 recapture, but this was not articulated in your example and was not even your point, it seems.

LLC does not change your taxes, and it's even possible that cost segregation does not. Ideally, you should have consulted a real estate tax pro before doing that. Read these posts:
https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

https://www.biggerpockets.com/forums/51/topics/1075919-five-...

And this is my advice on finding a real estate accountant here on BP:
https://www.biggerpockets.com/forums/51/topics/1222774-expla...

@Anthony Chan

It seems that you're missing the concept of depreciation recapture and expecting to get some refund from your previously overlooked mistakes. Sorry, not the case.

Here's an oversimplified example. Let's say you bought a property for $350k, consisting of $275k building and $75k land. You were supposed to deduct $10k per year in depreciation. If it was in service for 10 years, it would be $100k worth of depreciation taken. Suppose you're selling it today for $500k. You owe two taxes:
A. capital gain tax on $150k ($500k sale - $350k purchase)  PLUS
B. depreciation recapture on $100k of depreciation taken.

Now, let's assume that you messed up somewhere along the way, and you only took $70k worth of depreciation instead of $100k. Here's what's very important to understand: you still owe depreciation recapture tax on $100k, not on $70k!

Which, of course, is unfair because you only took $70k of depreciation deductions but have to recapture the full $100k. Form 3115 allows you to restore the fairness in this situation and "catch up" with the remaining $30k of depreciation that you failed to take in the years past. You don't get this $30k catch-up deduction back as a refund. You are taking it via Form 3115 - and immediately forfeiting it via depreciation recapture. But at least you're getting a wash instead of getting screwed.

As my colleagues said, Form 3115 is not a DIY project. Prices will certainly vary between different tax firms. In my firm, you would probably pay around $3,500 for this tax preparation, including Form 3115.

Missing interpretation of the rule. 50% of TOTAL hours worked.

1,000 at W2 + 750 in RE = 1,750 total work hours 
750 out of 1,750 total is less than 50% = you lost

He will need MORE hours in real estate than in W2 job

Sorry about your  and your tenants' ordeal. Most of the responses show lack of understanding of how it works. It's way more complex than saying "not taxable." And it depends on what you do next - rebuild or sell as is or some other plan. 

If you spend the entire $300k restoring the property, then here is the end result:
- deductible casualty loss of $50k
- no current tax
- the restored property has $0 basis and cannot be depreciated
- when it is later sold, the entire sale price is taxable

Mechanics and reporting are tricky, and I would not recommend to DIY it, especially since my scenario is over-simplified, and your real scenario is likely to involve more gotchas.

@Gregory Wilson  - partnership return compliance has become insane in the last several years. There are dozens of check boxes, some of them matter, and Balance Sheet and capital accounts are now required. The time of DIY partnership returns has passed.

Too bad that BiggerPockets does not offer an LOL reaction. You deserved two of them for your AL stand-up routine. Well done.

My 1st comment is outside of my area of expertise. In other words, it is to be ignored. I don't think that simply having an LLC would protect you from that Bubba the roofer. But I'm not an attorney, so maybe I'm totally wrong on this hunch.

My 2nd comment is directly within my practice area though. True, converting a personal Schedule E to a partnership will indeed reduce your IRS audit chances, statistically speaking. However, once you decide to hire a true tax professional (and not one from AL), you will discover that your $1,500 tax preparation price without a partnership suddenly turned into a $3,500 price with the partnership. Whatever prices are offered by your chosen CPA, expect them to double with a partnership. Is it worth a reduction of an already very small probability of an IRS audit? Not on my planet.