All Forum Posts by: Michael Plaks

We should stop referring to REI as investing and call it business - which it is. Investing is relatively simple, passive and familiar. Business is unfamiliar, complicated, risky, scary, time- and labor-consuming, etc.

So, this is the shortest answer to your why.

@Dave S.

"Double down" is not really the term. You must be referring to the 200% declining balance depreciation which is one of the many methods of accelerated depreciation. Some pointers for starters:

1. Real property itself (buildings) can only use straight line depreciation.

2. Other property such as land improvements (fences, driveways, landscaping), personal property (appliances, carpets, removable cabinetry) etc. can use either straight line or one of the accelerated methods, including sometimes 100% upfront.

3. Cost segregation aka asset segregation is a strategy of separating the items mentioned in #2 above from the real property, in order to create opportunities for accelerated depreciation and increase the total depreciation deduction.

4. Pros of accelerated depreciation: bigger depreciation deduction and therefore less taxes in the early years.

5. Cons of accelerated depreciation:

• sometimes your ability to deduct depreciation is limited, so there're no extra savings
• depreciation deductions get smaller in the later years, because you're basically front-loading on them
• it takes additional work and, if you hire professionals for the cost segregation - extra cost
• all depreciation eventually has to be recaptured (returned to the IRS), increasing taxes when you sell
• if you do a 1031 exchange to delay taxes upon sale - cost segregation makes 1031s more complicated
• more complicated tax returns in general

6. There are some higher-level tax planning considerations that compare differences from year to year, impact of one-time tax events, changes in the tax law etc.

@Dave S.

Report reimbursements as income and then your payments as utility expense - resulting in a wash. No additional taxes, and no IRS flags.

@Account Closed above.

Important: both points above assume that we're discussing a rental property. If this property is a flip property, then none of the above matters. Flip properties do not have capital gains, long or short term, and they do not have in-service and depreciation concepts.

@Jon Holdman  - I meant that I, being what you termed "a knowledgeable accountant", was impressed with your non-accountant explanation. :)

@Antoaneta Ortiz

You received good advice, except from @Darrin Carey. Both of his statements were incorrect.

For taxes, LLC is not an alternative to partnership or S-corporation. LLC is a legal entity created for legal protection at the state level. It can then choose to be taxed at the Federal level either as a partnerships or as an S-corporation (both of which are pass-through entities for taxes).

A good analogy is a universal power tool. You essentially buy an engine (LLC). If you insert a drill bit into it - you have a power drill (partnership). If you insert a screwdriver bit - you have a power screwdriver (S-corporation).

You can bypass an LLC and create a partnership or a corporation at the state level, but it is rarely a good idea. Ask your lawyer if there're any benefits to this approach - which usually are not there.

@Jon Holdman - excellent explanation! Thumbs up from "a knowledgeable accountant."

@Bharath Raj

Hi, Houston neighbor.

You're entitled to deduct the taxes you paid, no matter who received the bill and who claimed what. If you are ever audited, all you need to show is proof of your payment and proof that you were liable for it (invoice + proof of partial ownership.) Trying to get Harris county to split the bill is not worth the hassle. 

@Steven Hamilton II - thanks for clarifying this for me. :)  OPR duly notated the files - yours and mine.

Now, that aside, are you willing to talk about the issue - privately if you prefer? When dealing with interest tracing, I feel like that guy who knocks on the windows of cars admonishing drivers for not using turn signals. And everybody is like - dude, nobody uses them, you're just impeding traffic, get lost. 

@Dave Foster - please see above, I could not tag you in the prior post for some reason