All Forum Posts by: Michael Plaks

@Cameron Skinner

Related party restrictions apply to sales of remainder interest only, not to other transfers. Check Sec. 121 and Regs 1.121. 

Where cases went for the IRS was not due to related party issues, as far as I recall. Please show me otherwise if you have specific precedents. Always possible that I'm not aware of something.

@Cara Lonsdale

It was suggested above that you have two options to fix incorrect past depreciation: a simple amending and a very complicated Form 3115. 

That is only partially correct. You are NOT allowed to amend past returns to correct depreciation. Form 3115 is the only clean way to do it, but it's absolutely not a DIY project.

@Greg Pratt

Thumbs up on you taking the effort to explore your options.

First, there are two errors in the comments posted by @Cameron Skinner. Related party rules do not stop this exclusion, known as Section 121. (Technical details: that limitation only applies to sales of "remainder interest" - which is not the case here.) Also, the tax reform did not change the rule to 5 out of 8 years. It was in one of the proposals, but not in the final bill. The rule remains 2 out of 5.

Second, it is possible to sell to an S-corp or C-corp if it is structured as a bona fide sale - i.e. the same as it would be with an unrelated party.

Third, you do not need a salary if your S-corp simply holds a rental property. And you can take all the deductions.

Fourth, there're indeed potential complications with both S-corp and C-corp holding rentals which is a separate topic. They should not outweigh the benefits of erasing $250k of gain.

If you want more details past this intro - you would probably need an actual consultation with an expert.

@Carl Fischer

I vote "Consider it a gift, expect not to get it back and be pleasantly surprised if you get anything returned." as the best comment of January. So true!  :)

Expecting under $500 for a quality job with rental properties is unrealistic. Such low prices are possible, but I would not expect them from an experienced person who understand real estate - meaning you are not really better off than doing it yourself. 

Asking whether the cost of service results in an equal increase of tax refund is missing the point. Maybe it will, maybe tenfold the cost - and maybe it won't. You're not just paying for a refund, you're paying for sound sleep and preventing costly problems down the road. 

And the most important contribution from a tax pro is advising you forward: tax planning, business practices and such. This is where the real value is.

@Cara Lonsdale

First, depreciation is a loan. You get to take a deduction now, and it lowers your taxes now. When you sell - you "repay" the loan, meaning that you pay more capital gain tax at sale. The technical term is "depreciation recapture" - you can google my blog post about it.

Second, as @Linda Weygant pointed out, you must take at least  some depreciation, it's not optional.

Where you do have some room to play is how much depreciation is taken. There're various techniques to increase or decrease it, to a degree. Like with a loan - the more you take, the more you have to return. So, if you increase depreciation now - you might get more savings today. The flip side is that you will get higher taxes when you sell.

Whether or not it makes sense to increase current depreciation (what you called "benefit or harm") - depends on a lot of factors, and it can only be decided case-by-case. The rule of thumb says - go for it, but it's not reliable, as we all have different thumbs.

It's actually AND, not OR. Both tests must be met, and there're more rules, as @Lance Lvovsky said. 

@Megan

Yes, generally a full-time job precludes RE Pro, but in rare cases it might work - so discuss with a competent accountant whether you can qualify.

Already answered your question, @Gulliver R.   The answer is yes, although this is the wrong way to look at it.

It may be hard to 1031 a property after holding it for only 5 months. Even more so if you intend to sell the second one shortly after.

And if you sell it in July 2018, you will pay in 2018. There is no rolling over.

@Gulliver R.

One thing at a time, do not throw everything on the plate.

Financing and capital gains are not related. You buy some land for $100k and eventually sell for $150k - you have $50k capital gain. It is the exact same gain whether you paid $100k cash, financed $50k or financed $100k.

Accordingly, cash-out refi is not taxable when done. It also does not change future capital gain. Yes, you can think of it as "paying for the refi cash when the property is sold" - which is not technically correct, but is economically correct.

If you do a 1031 - capital gain is postponed, including the tax on the refi portion.

You cannot sell and then 1031. 1031 is done instead of sale and must be set up before you sell. There's no proceeds to roll over. You never touch the money during an exchange. If you touched the money - you lost the game.

1. True - if you treat it as a partnership and file a separate tax return. Not a good enough reason to go the partnership route if this is the only reason.

2. Can't comment, not being an attorney. But I suspect it could be the same situation as with #1 - as in useful perk but not a big deal. 

From what I heard from attorneys, the main reason LLCs fail is being sloppy, not being single-member.