All Forum Posts by: Michael Plaks

@Dave Foster, you know we both like pushing the line, and I like your creative thinking. :) 

This setup will lack economic substance, because his son does NOT have the money. I'm not even sure that you can have a legally valid lease contract with a person who has no money of his own, but that's for attorneys.

Point is - dependency or not, this suggested transaction is a round-trip and, as such, will not hold water if challenged. If I was on the other side of this argument, i.e. the IRS side, I would destroy it.

I'm waiting for someone to suggest that @Brian Henry can simply ignore his son's living there and pretend that the house is 100% rental, with only 2 tenants. This would be the simplest and the most beneficial approach, by far. With one minor inconvenience of being untruthful representation and therefore illegal. For a lot of people, this would not be an obstacle.

@Brian Henry

You're correct. Treat this deal as two properties. 1/3 of everything, including acquisition and rehab costs, is the personal property. The other 2/3 is rental property.

The form is the same as any other rental property - Schedule E. The only trick is to enter 2/3 of every number.

Doing Schedule E for the first time on your own is possible, but mistakes are also possible, especially in the initial setup. My recommendation is to let a professional handle it the first year.

@Sam Shueh and @Dave Foster

While having 100% rental is simpler and more beneficial - you cannot manufacture facts. Not legally, that is. 

You cannot simultaneously provide housing support to your son, to qualify him as your dependent, and then reverse this fact on another page of your tax return claiming the same money as income coming to you.

@Ashish Acharya - of course you're right on the second home distinction. I was trying to simplify my answer, and the distinction you pointed out does not change the bottom line.

@Eric Thornton

As many before me explained, using a $50k 401k loan is an easy route. By the way, $50k is only one of the limits, and the other one is 50%. So, if your 401k is $80k, then you can only borrow $40k.

Problems with such loan are a 5-yr repayment window and a possibility of an early recall if you leave your employer.

If you do leave your employer, then you can (and probably should) roll your 401k over to a self-directed 401k. Talk to some expert in this arena, like @Dmitriy Fomichenko or @Brian Eastman.

As long as you stay at your job, you cannot use 401k funds for your REI business, other than via a loan. You will be limited to IRAs. However, your CPA is incorrect suggesting that you will be constrained by annual IRA contribution limits. You cannot contribute more than that, true, but your IRA is allowed to borrow money. You only need enough for a down payment.

Borrowing within a self-directed IRA triggers some taxes, so be sure to talk to an expert before doing it. Alternatively, you can try to aggressively grow your IRA with other investments before using it to buy properties.

Also true, you cannot take the money out - but it's the whole point of doing it! Keep the money there and let it grow tax-free.

@Brian Henry

I assume than not only your son is not paying you any rent, but he is also your dependent on taxes and not working.

Then 1/3 of the house is a personal residence, and you can only pick up 1/3 of mortgage interest and 1/3 of property taxes on your personal itemized deductions (Schedule A). If you do not itemize your personal deductions - then those two deductions are lost.

You also have a rental property to be reported on Schedule E with 2/3 of every number, except 100% of rent. 2/3 of mortgage interest, taxes, insurance, maintenance, utilities and depreciation.

Now, if your son's roommates are paying less than the market rate - then it's more complicated, per @Ashish Acharya's post.

@Rick Jones

Don't! It used to be acceptable but no longer the case. IRS computers tag this as an audit flag, and IRS auditors frown upon it for several good reasons. And it does not benefit you in any way.

Distributing between existing properties is the correct way to go.

@Bruce Chenowith

I have to assume that the building was specifically purchased for the partnership's use, and it was titled in your name for logistics purposes. If so, there should have been a partnership resolution authorizing you to make a purchase on behalf of the partnership and the partnership formally accepting financial responsibility for it.

It is then considered a partnership asset, belonging on the balance sheet and treated as partnership's for all other purposes, including depreciation. All the income should be paid into the partnership, and all the expenses should be paid out of the partnership.

If some of the expenses have been already paid by you, the partnership needs to reimburse you for these expense.

It is better - but not required! - to transfer (deed) the title into the partnership, however it can create complications with the lender and the insurer, so check with your attorney on this one.

Now, if you already owned and used the building and then later decided to let the partnership use it - things are more complicated.

@Jeremy H.

The ploy by the CA legislators that @Ashish Acharya described will probably collapse if the IRS challenges it - either with a blanket decision or via individual audits.

I've represented clients against the IRS for 20 years, and I would take a case like this, but I'd estimate my chances of prevailing as less than 50%.

Frankly, I expect this specific tactic to be explicitly prohibited before it's time to prepare 2018 tax returns.

@Chandu Batata

I assume you're talking about a wholesaler's assignment fee paid at closing. Yes, you generally need to issue 1099-MISC. An exception is if this is a rental property and you're just passively holding it. Even then, I recommend sending 1099s.

It's not a good sign that your CPA cannot answer or research this one.