All Forum Posts by: Michael Plaks

@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.

Quote from @Annie Anson:

My husband and I are ready to invest in our first vacation property, likely in Florida...  a short term rental property. 

What adds complexity to our plan, is that we live in Minnesota... 

...How challenging is it to meet the material participation hours needed to achieve active status?.. Is it possible to have a property manager who manages some of the property, while I manage the rest remotely? For instance, said property manager manages maintenance issues, problems that arise during bookings, basically anything that needs a physical person at the property, while I manage the rest? (i.e. initial decorating and painting, bookings, rate structures, marketing, bookkeeping housekeeping, etc)? 

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. 

Quote from @Will Almand:

I am very passive with both of these properties. I have a property management company manage them as I have a full-time job, wife, and 2 boys. Also, my income is over $150,000. Based on those 2 categories, it sounds like a cost seg makes not make sense in my scenerio. 

Most likely your conclusion is correct, but the only way to confirm it is by having a real estate accountant review your tax situation.

Also, please read this introduction if you want to better understand the concept:
https://www.biggerpockets.com/forums/51/topics/1075919-five-...

If I read the story correctly, your client did not report rental income. Translation: your client cheated the IRS and the states. And must be pretty significant unreported income if it would have caused $45k in state tax liability.

You advised your client to wait past the expiration of state statute. Translation: you helped your client to protect their cheating against the state assessment.

I understand that your client, as a result, avoided paying $45k. I'm sure the client is happy. I'm not sure I would label this result "saving money" for your client, and I'm not sure I would brag about it.

And just confirmed by another BP member:

Quote from @Kathy Kifer:

OK Thanks.  What's even more frustrating than asking the IRS help desk, is asking a Turbo Tax "Tax Specialist". Last time I did that, years ago, I got off the phone and figured it out myself. 

Look at this post re: TurboTax specialists  :)
https://www.biggerpockets.com/forums/51/topics/1226092-remin...

Quote from @Kathy Kifer:

I'm so glad I stumbled across this today. Did not see it a while back when I was looking. Your posts are unbelievably helpful.  I finally understand that credit card payments are exempt from needing to send 1099's. What about Debit Cards attached to a checking account? Upon "googling" I see where some folks include Debit Cards as not having to send 1099's, but I want to be certain.

A lot of contractors lump their labor and materials together. What is the best way that you have found to tell them that you need labor & materials separate, so at tax time you can send them a 1099 for labor? I've had some not happy when I have asked them to split it out.

I've tried asking questions to the IRS customer service reps, and didn't have the best luck.

While I cannot cite a specific official guidance on this issue, I consider debit cards exempt. The simple reason is that you cannot even tell debit cards from credit cards without a special software. I could be wrong.

What you tell contractors is: if you do not separate labor from materials, then I have to report my ENTIRE payment, L&M, to the IRS as your income, and then it will be up to you to deduct materials from that income on your end. 

As to asking the IRS reps, let me limit my comment to just three letters: LOL

Quote from @Samuel Kim:

Hello i am a doctor who wants to use cost segregation/bonus depreciation on my 9 rental houses, my home maker wife wants to meet the 750hr test to obtain real estate professional status and material participation.

Is it possible for her to have that many hours (750h) by managing our 9 properties? all are new constructions and I don't know how she is gonna be able to find 750h of work to do in these new construction houses.

We're talking about 15 hours of hands-on work every single week of the year. Suggestions like driving by the houses weekly are silly, such trips serve no legitimate business purpose. 

If these houses have stable long-term tenants, I share your concern. It's next to impossible to accumulate this many hours. Unless you have unusual circumstances such as a month of DIY repairs on one of the houses, your wife would need to find more real estate work for herself. 

And DIY repairs are not recommended for other reasons: it will take you much longer to complete, depriving you of rental income, and you run a high risk of your wife becoming your ex-wife.

Same risk exists if you push your wife into becoming a Realtor or some other real estate activity just for the sake of tax benefits. Also, the tax benefits you expect might be over-hyped: https://www.biggerpockets.com/forums/51/topics/1075919-five-...

Figuring our whether there is a useful tax strategy in your situation would take a one-on-one consultation with an experienced tax strategist, and here is how to find one: 
https://www.biggerpockets.com/forums/51/topics/1222774-expla...

This is a screenshot from a private Facebook group for tax professionals. The person worked for H&R Block, now works for TurboTax Live and is being honest about their skills: NOT QUALIFIED. And this does not even involve business or real estate!

I rest my case.

And here is my older post on finding good CPAs:

https://www.biggerpockets.com/forums/51/topics/1222774-expla...