All Forum Posts by: Michael Plaks

1. You're over $150k, so no $25k allowance.
2. Qualifying for REPS seems unattainable with your wife's part-time job.
3. And even without, you can hardly find 750 hrs (15 hrs per week) with 2 long-term rentals
4. And without REPS cost segregation is pointless

You unfortunately received a good sounding advice which is not applicable to your situation. Something that happens on this forum daily.

Quote from @Jason Malabute:

If the insurance payout ($380K) exceeds your adjusted basis (original purchase price + improvements - depreciation), it creates a taxable gain. 

Your sentence is misleading, Jason. The way it comes across is that his insurance payout escapes taxation, as long as it's below basis/purchase price. That would likely be his impression from reading your sentence. 

In reality, the insurance payout reduces the adjusted basis. If he kept the house, then your statement would be correct, because there is no immediate taxation of insurance payout. It is deferred until sold, via invisible basis reduction. But since he sold the house, the entire insurance payout ends up taxable now. Technically we should call it basis reduction, but the end result is the same: he owes tax on the entire insurance plus appreciation plus depreciation.

@James Boreno - please ignore the above very technical clarification. It was written for my colleague who speaks tax language.

Quote from @James Boreno:

One of my SFH caught on fire and I'm in the process of selling it to a contractor. Had a quick question.

I purchased the property for $500K about 10 years ago

I'm selling the property for $575K with the Fire Damage

I received an insurance check of $380K for the fire damage.

After Paying off the Mortgage + Escrow + Realtor Fee's, I'll be left with about $150K.

My question is will I get taxed on this $150K?

I assume we're talking about a rental property. You will be taxed on way more than $150k, and also this $150k number is totally irrelevant for the tax calculation anyway. Your mortgage has nothing to do with your taxes.

Here is a very rough starting point, however the actual calculation will involve more details:
1. Add $575k, $380k and depreciation taken over 10 years.
2. Add $500k, capitalized improvements made over your 10 years of ownership and closing costs.
3. Subtract #2 from #1.

This will give you a very rough number on which you will owe taxes. However, other factors will matter, and the rates of taxation are different for different components of this Step 3 result. It's not simple, sorry.

If you have not closed, consider tax mitigation strategies such as a 1031 exchange. It will be too late after you sell.

Quote from @Hitanshu Shah:

Hi Michael 

Some of the strategies that we are told may help us apart from REP Status for my wife are the following. Would like to know why these will *NOT* work for us:

1. Cost Segregation/Accelerated depreciation.

2. Augusta Rule - Renting your house for a few days a year. 

3. Paying your child for work from your LLC.

4. Having your LLC pay for Vacation/Trips as a pass through expense.

None of them will work for you. All you have is long-term rentals. They cannot generate currently deductible losses, period. Not in your situation, i.e. not without REPS or STRs. (And #4 is fraudulent when we're talking about vacations)

Quote from @Hitanshu Shah:

Hi Michael - All of the assumptions above are true except one - My wife has a part-time W2 Job where she works about 84 hours in 7 days a month but is off the remaining time. How will that change tax strategy?

She would then need to spend 85 hours per month (average) working on something hands-on with your two properties. I don't feel it's realistic with 2 long-term properties, save for some unique circumstances. Read my rant and the after-the-rant debate here:
https://www.biggerpockets.com/forums/51/topics/1226431-real-...

If you're after offsetting your W2 income, you would need something other than your two long-term rentals. Short-term rentals, becoming a realtor, certain non-real-estate investments. All of that comes with significant risks and complications. If it was easy, nobody would be complaining about W2 taxes.

Any of the 20+ tax professionals on this forum can prepare your 2024 taxes. None of us can offset your W2 taxes however, we can only eliminate taxes on your rental income but not on your W2. With what you currently have, that is. 

And, if you find some colleague of mine who can actually accomplish it (not merely promise, but accomplish) - I would love to hear about it. 

@Hitanshu Shah

I'm sure you will find some volunteers promising to know tax secrets (but unable to  deliver them later). And soon this thread will be full of enthusiastic statements and discussions of cost segregation, retirement plans and whatnot. So, before the cheerleaders come, let me give it to you straight.

If all of the below is true in your case:
- Both of you have full-time (40 hrs) W2 jobs
- Your jobs are not in real estate companies where you are a part-owner
- Your combined income is above $150k
- Your properties have long-term tenants (as opposed to AirBnBs)
- You have no other real estate businesses
then you CANNOT offset your W2 incomes with your rentals. 

All of those juicy hypothetical benefits are out of reach to you. You will need to change one of the above factors in order to unlock these benefits: invest in something different like STRs, quit your job and become a real estate agent instead etc.

And now let me leave before the party starts. The "sure, you can save many thousands with a smart strategic CPA" battalion is on the way already. Open the door. They are going to tell you what you want to hear. The sad fact that it won't work for you is a minor inconvenience.

Quote from @Victor Yang:

If I gift a house, what amount will go towards the lifetime gift limit, the amount i purchased the house for, or the current FMV?

It is my understanding that the new owner will have the house at the cost basis of my purchase price, for calculating capital gains taxes or depreciation.

For gift tax purposes for you - FMV.
For capital gain tax purposes for the recipient - your original basis/purchase price

According to one of my colleagues on that thread - yes.
According to court - no. I rely on the court decision and say no.

@Jonathan Small

Hmm, shouldn't your partners worry about their taxes and not you?

That said, what is not clear is whether your CPA prepares a partnership tax return for the deals where you guys partner up. I assume he does, and with this partnership tax return he issues Forms K1 to you and your partners. K1s show your share of income or losses from the partnership, and you include it on your respective personal tax returns.

Now, to your partners. W2s, personal homes and K1s are usually straightforward and can be DIY-ed by most computer-savvy and financially-savvy people. The remaining potential issue is their rental properties. It also can be DIY-ed, and many people do. However, chances of making a mistake or overlooking an opportunity to save are higher when it comes to rentals.

The dilemma is whether it's worth paying a professional in this case. Nobody can answer this question. Sometimes, we tax professionals can save you a lot of money or save you from a major problem. And sometimes, we are not materially improving what you could have done  yourself. 

This post can be informational:
https://www.biggerpockets.com/forums/51/topics/1088325-expla...
as well as this discussion:
https://www.biggerpockets.com/forums/51/topics/1225072-do-i-...

A lot more of similar older threads can be found on this very forum.

@Samuel Kim - please contact @Chris K. privately and allow him to show you how you can benefit from this wonderful strategy that he implemented for his many health professional clients. I profusely apologize for leading you astray with my irresponsible and reckless advice, as per Mr. K.'s comment.