All Forum Posts by: Michael Plaks

@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

Colleagues, these are you opinions and interpretations. Let's talk the law, shall we?

@Dave Toelkes noticed ONLY the end of the phrase in Reg 1.121-3b(6) and decided that it "limits..." 

What about the beginning of this same sentence, that reads: "Factors that may be relevant in determining the taxpayer's primary reason for the sale or exchange include (but are not limited to) the extent to which..."

Did you notice "may be relevant" wording that I bolded? This is merely a list of suggested factors - which is NOT a prohibitive limitation. I see room for interpretation.

@Linda Weygant

Close to $0 taxes with a $500k net income from non-RE business? I doubt so. :)  Unless you plan to *replace* your current business with passive RE investing.

But less than $250k or $400k is certainly possible.

@Rachid B.

I respectfully disagree with @Dave Toelkes on this one.

The exceptions initially listed by @Basit Siddiqi are part of Regs. 1.121-3 which do not restrict the limited exclusion to the "before 2-yr" scenarios only, as far as I can see. The limited exclusion is potentially available whenever any of the three tests fails, regardless of timing. Please correct me if I'm missing something in these Regulations.

While it would be hard to meet the legal criteria in your case, it nevertheless seems possible under the right circumstances. For example, if you have to sell this property because a change of employment makes it impossible to continue leasing this property. It does sound shaky, and it does seem to violate the spirit of the 2-out-of-5 rule, but I don't see where such scenarios are specifically prohibited by the Regulations.

Worth a try, in my opinion. By trying I mean discussing with a real estate accountant, examining your specific circumstances.