All Forum Posts by: Michael Plaks

@Joe Wood

On a SFH, a professional cost segregation study is usually cost-prohibitive. You or your accountant are allowed to segregate assets without such comprehensive study. The risk is that the IRS might challenge your allocations, and you will have to prove them.

The IRS does not challenge professional cost segregation studies, but like I already said - they are not worth it for SFHs.

As to your ability to have a large 1st year deduction with cost segregation - certainly possible. 

@Nick B.

I'm not sure what you guys call "sponsor entity position" but, in my suggestion, you own the holding entity 100%, so your payments to this person become a P&L (profit & loss) item when made. In your terms, count against NOI.

@John Newsom

Non-performing notes are what we call grey area. There are no black-and-white laws that apply to them, so different tax professionals have different opinions.

My opinion is that the market discount rules do not apply to NPNs. I believe that 100% of principal payment can be applied towards return of capital until completely recovered. What happens after that is unclear. I would treat it as capital gain, but the IRS may disagree and try to treat it as interest. Like I said - grey area.

Here's the real kicker. What makes a note PN vs NPN, for the IRS purposes? Let's say it's whether it was in default at purchase, fine. But since you're receiving payments, does it mean that it is now PN? And what happens when an NPN is converted into a PN? Nobody knows for sure.

Like my colleagues mentioned, H&R returns are often ridden with mistakes, even for relatively simple situations like yours. But so are returns prepared by some professional tax firms, including CPAs and EAs. In fact, there're CPAs and EAs working for H&R. I know some very good people working for H&R (I don't know why they work there though, haha)

The key is to find a competent person and create a long-term relationship, just like in any other important area: doctors, mechanics etc. The chance of finding such person in a small tax firm is higher than in a chain store (notorious for high turnover) - but you still need to check competence.

Not everyone does a free review, but if you can find someone who does - it's a good way to verify that you got a quality job.

@Aubrey P.

I want to emphasize the critical part in @Ashish Acharya and @Lance Lvovsky answers and make sure you understand how important it is: the step-up basis.

Say the parents spent $500k buying these properties at some point in the past, and today these properties are worth $1.5 mil.  If they transfer the properties to the children now, the children's tax basis is $500k. If they turn around and sell the properties, they have to pay taxes on $1 mil capital gain.

In contrast, if the properties stay in parents' name and eventually transfer to the children via inheritance, the chidren's tax basis is $1.5 mil (or whatever the market value is at the time). If they sell the properties then - they pay ZERO capital gain taxes. This is what is called "step-up basis", and it is a huge deal. So do NOT transfer the properties now.

One exception to this advice would be if the parents are trying to get rid of their assets to qualify for Medicaid later on. Then the children suffer capital gain taxes as trade-off.

@Kevin Romines  suggested that "All assets that you hold in that same LLC will have the status of dealer and be taxed according to that status."

This is a common myth. The IRS might try to go that route, but you can defend against such attack if the properties are true rentals.

Your CPA can have some valid reasons to suggest the change, but concern about dealer status is not a very good reason.

@Peter Mikhjian

You can buy a car, but the deduction will be limited. You will have to figure out business use percentage and depreciate the car, and regular car have strict limits to the depreciation. 

You could potentially buy and deduct a large truck, but you will need to show that it is used mostly (or exclusively) for real estate business. And it has to make sense. Buying a $50k truck to manage couple houses just does not make economical sense.

Even if you could somehow pull that off - this strategy will backfire later on, when you sell the truck. The entire amount will become taxable.

In the future, keep in mind that a 1031 has to start before the property is sold, not after. 

Also, I commend you for making a VERY smart business decision and NOT buying a bad investment, just to save on taxes. Thumbs up!

@Ryan H.

I like your thinking. I don't see why not, as long as the funds are used for legitimate business purposes and not commingled.

You can probably accomplish more with a husband-wife LLC, but it's a different conversation.

@Russell Brazil

Are you sure that "under contract" is enough of the safe harbor?

@William Behm

Actually, a lot of people are talking about it. That is - assuming that the tax reform does happen.

It is very possible that there will be some transition period or a phase-in or some kind of partial exclusion for people in your situation. Of course, nobody knows as of today.

One way to protect your deduction is to sell in December. If you need to stay for another month, you can possibly lease it back from the buyer.

You can also try to sell it temporarily to a friendly party, including an entity. You need to be careful that the sale is "arms-length" and is not just a smoke screen. The purchasing party must have an unrestricted right to resell the property, to evict you etc. I would not do it without consulting a good real estate attorney.