All Forum Posts by: Michael Plaks

@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.

@Michael Overall

Your question is good. My answer won't be, and for two reasons. The first is that there's no consensus between tax professionals, and the second is that you will not like my personal interpretation.

My interpretation is:
Until the property is "placed in service" - everything goes into basis.

Illustration.
You buy a property July 1st.
You finish rehab November 1st and put the property on the market.
Your tenant moves in January 15th.

The property was placed in service November 1st, and it does not matter that the tenant did not move in until the next year.

Everything paid between July 1st and November 1st, including interest and utilities, goes into basis. Everything paid starting from November 1st is deductible.

Now, to the controversy that I mentioned, and ONLY if you really want to go down this rabbit hole. Your question has been debated between BP tax experts both privately and publicly, for example here: 
https://www.biggerpockets.com/forums/51/topics/819991-expens...
And we ended up where we started: no consensus and no clarity.

There have also been court decisions that support my interpretation, even though I personally find these court decisions debatable. (Mears, 2013 referencing Wilson, 2002 - for my curious colleagues). But I choose to rely on these court decisions. My colleagues may choose a different position.

I do not know his entire situation, this is true. But neither do you, yet you started with:
"Short answer is "yes"  - which I consider misleading.

And you manipulated the OP's question to fit your agenda. He did not ask:
"Is it possible..."
In which case your reply would have been appropriate.

He actually asked more specifically:
"Is it possible for her to have that many hours (750h) by managing our 9 properties?"
Which makes my answer, as opposed to yours, applicable.
Especially since I qualified mine by adding "...unless she adds more real estate work"

Your argument reminds my of an old joke:
- Doctor, will I be able to play violin after this surgery?
- Most certainly!
- This is great news, because I have never played violin before.

And speaking of arguing, we are actually in agreement on the validity of REPS strategy, and I have many clients doing this. We are also in agreement on implementation, such as the need to document hours. And of course we're in agreement on consulting a tax pro.

We only disagree on what is basically a customer service issue. You want to give a generic answer (as in, yes, you can get pregnant) while I want to customize my answer to the person asking (as in, no, you cannot get pregnant because you're a man). And then you argue with me saying that I don't know all the details (as in, well, these days even a man can get pregnant.)

As an attorney, you are trained to read the entire text. Mine said:

Short story is:
A. Can your wife qualify for REPS in theory? Certainly, this is a common strategy.
B. Can she qualify in your specific situation? No. Not unless she adds more real estate work.

So we are actually in agreement. Except you insist on giving the OP a "yes" based on the generic strategy (A) while I insist on giving him a "no" based on his specific situation (B).

To answer your question to me - no, I'm not trying to be controversial. I'm trying to be specific and helpful for the question posed by OP, for his particular situation.

@Brett Riemensnider

You don't need to provide anything to your tenants tax-wise.

You might need to file 1099s if you used contractors or other people whom you paid for labor:
https://www.biggerpockets.com/forums/51/topics/1167632-expla...

Thank you for teaching me about taxes 

@Nick Am

You're making conclusions and, much worse, business plans from very limited and, in your case, completely wrong understanding.

Self-employment tax that you will pay on your property management income is not instead of ordinary income tax on rental income. It's in addition to this tax. So, by transferring income from a rental schedule E to a business schedule C you're creating a significant extra tax. You will owe more, not less, taxes.

Is it still worth it? Maybe, but not for tax savings. Maybe for a retirement contribution or for some other reason.

S-corp has no purpose at all in your case. Not going to give here a lecture on S-corps, but take my word: no benefits, only extra hassle and extra cost, such as preparing another tax return. As @Brett Synicky suggested, keep it simple, as a sole proprietorship.

You are also not considering that you will have to pay $800 per year and per LLC to your greedy state.

In short, get some professional advice instead of TikTok advice.

First, do not get upset with the words "likely" or "possibly" - these words are accurate. Yes, I was tempted to type "these words are likely accurate" ;)  The reason is because tax rules are very much case-by-case, and your mileage may vary.

Here is an important clue in your particular situation: 
...I manage the rest? (i.e. initial decorating and painting, bookings, rate structures, marketing, bookkeeping housekeeping, etc)...

Let's count how much time you are going to spend doing what you described. Let's say you spent a month on the initial preparation: cleaning, painting, shopping for furnishings, assembling IKEA furniture and so on. We're possibly (sorry for using the p-word) talking about 200 hours. For the next 10 months (40 weeks) you spend a fairly reasonable 5 hours a week marketing, communicating with guests and your property manager and bookkeeping. Here is another 200 hours. We now have 400 hours in the bag, and hitting 500 is attainable during your first year.

But what if you only spent 2 days visiting this property and from that point on outsourced all work? Yes, you still do online shopping and coordination and so on, but hitting 500 hours in this case becomes far more challenging. Do you see why we accountants say "likely" and "possibly" in every paragraph we write?

If you cannot make 500 hours, then you need to make 100 hours and "outwork" everybody else. Let's say you have a guest every week for 10 months. This is 40 guests. And you use a cleaning lady who spends 5 hours to reset the property for the next guest. Now your cleaner has 200 hours, and you will have to spend at least 201. Is it doable? Well, at least it's much easier to gather 201 hours than 500 hours. But now you have a challenge of documenting both your time AND time of everybody else involved with the property.

Now, to answer your question - is it possible from out of state? Yes, it is, particularly if you undertake the initial preparation and furnishing of the property yourself. But the only way to have a definitive answer and avoid "likely" and "possibly" is to analyze your plan with your own CPA and find ways to boost your hours. Here is how to find such a CPA:
https://www.biggerpockets.com/forums/51/topics/1222774-expla...

You probably (argh, can't help myself) noticed that I was pointedly talking about the initial year. What about the second and third year when you no longer have the labor-intensive initial setup? Actually, you may not need to qualify in the second year. Why? Because your second year is likely (oops, I did it again) to show a net profit instead of net loss. It is your first year when you get the major tax savings windfall due to cost segregation and bonus depreciation. More about the concept of STR tax savings is here:
https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

As to one CPA saying that your losses would still be passive, we cannot comment. Maybe you misunderstood what that CPA said. Maybe they meant a different context. Maybe they were not very good. But now you know.

@Samuel Kim

Even though I already gave you an answer earlier on this thread, I need to add a few comments after seeing some totally irresponsible and reckless advice given by other commenters.

Short story is:
A. Can your wife qualify for REPS in theory? Certainly, this is a common strategy.
B. Can she qualify in your specific situation? No. Not unless she adds more real estate work.
C. Can you try something else besides qualifying your wife for REPS? Maybe. STRs for example.

You were told...
"she can...  but careful planning and documentation are essential"
"...making sure that your wife understands what she needs to do to document her hours and activities."
Huh? Documenting WHAT?!? C'mon now, let's be real. You cannot document something that does not exist. Drop that empty hype, fellows. Yes, I said that, I call things what they are, I'm that old grumpy dude.

We need 750 hours. Where do we get it from?

From repairs and maintenance? Fine. How long does it take you to manage a maintenance request from your tenant? 1-2 hours per incident. Oh, I see, you are not going to hire a plumber. You are going to send your wife to personally unclog that toilet. Well, enjoy the couch tonight. But also, how long does it take in this case? OK, I will give you 5 hours. But we need 750 hours per year - or 15 hours per week. So we need 3 maintenance incidents per week, personally handled by your wife. Every single week, 3 incidents. Sorry, I'm not buying this story.

From make-ready's. Sure. How long does that take? So your wife will spend 5 full days repainting the whole place and scrubbing the bathtubs. Ok, we got 40-50 hours, tops. You had 3 of your 9 properties changing tenants. Yay, we have 150 hours!!! Still need another 600 hours. Which is 2 (instead of 3) 5-hour maintenance gigs every damn week.

From tenant changes. Gotcha. How many applicants did you interview? How long did it take you to negotiate the lease and oversee the move-in? 

From visiting properties? You visit occupied properties? For what? How often? For how long? No, it's not a normal business practice and does not pass the smell test.

From driving? Travel time has been treated unfavorably by courts, with a few exceptions. If you rely on travel time to meet 750 hours, you're playing Russian roulette with the IRS. And even then - travel where, how often and, most importantly - why?

From watching YouTube gurus and listening to BiggerPockets podcasts? Nice try, but this time does not count.

In order to meet 750 hours, your wife will need one of the below:
- do something else real estate related, like wholesaling or realtor
- actively work on expanding your rental portfolio 
- have an extensive DIY rehab, like a month-long full-time rehab (and then she might need another kind of rehab)
- a calamity such as multiple properties damaged in a storm where she will have to deal with insurers and contractors
- something else out of the ordinary

Again - if all you have is 9 single-family properties with stable tenants and typical occasional maintenance - you don't have enough work to collect 750 hours. Need something else besides lightly managing these 9 doors.