All Forum Posts by: Natalie Kolodij

A lot of people think of real estate this way. 

That they need someone to help them "make it a business" and want an entity to "operate a business". The truth is you either are or aren't a business either way. 

A business for tax intentions is defined in code section 162-and is basically the continuous and ongoing involvement for profit. 

Almost all rentals are technically a business, and your rentals are allowed to deduct the same qualifying business expenses with or without an LLC or an entity.

That being said I do understand what you're saying which is that you're looking for someone to help you treat this like a business-get all your ducks in a row, grow it, etc. 

The license IMO isn't the biggest factor at all. I have clients who are CPAs and pay me to do their taxes. 

The most important factors: 

-They are real estate specialized 
-They have an actual history/ foundation in tax. Looked into someone's history/look on linked in. Many people just "start doing tax" or buy a tax firm and then copy+repeat the same information they hear actual experts talk about without actually knowing any of it themselves. Social media has unfortunately made it way too easy to present as an expert even when someone isn't. 
-They focus on tax planning/strategy and not just tax filing. 

An LLC with 2 +members does normally require a 1065 filing.

The exception is: 

When the 2 members are married spouses who reside in a community property state. 

As Michael mentioned you just need to respond to the IRS and state this is what you're doing. It's in the form instructions for the 1065. 

Need a little more information to throw out a few ideas. What is the time frame for everything? 

The person you inherited the property from used it as a rental? 

When did it stop being a rental? 

When did you inherit it? 

When was the renovation done? 

Did you have an appraisal done at the date of death when you inherited it?


Also to note on that HELOC you took out on the property- with $80k going to personal debts and $50k going to the renovation. The interest being deductible is based on the use. So of the total interest you paid on that HELOC 62% (80k/130k) won't be deductible. Only the interest related to the $50k of renovation use of the loan will be deductible (38%)

I'm just here to note that an LLC does not offer a single tax benefit, nor does it allow any deductions that aren't allowed without an LLC.

There are a few things being mixed up here. 

Real Estate Professional = 750 hours and more time on real estate than anything else. That 2nd requirement is  what makes it close to basically impossible with a W2 job. Allows rentals to be non-passive. Material participation in the rental activities still required. 

A short-term rental with a stay of 7 days or less + Material participation =also non passive. Unrelated to your w2 job. 

The 500 hours test for material participation test has 0 to do with your W2 job. 

It's a literal quantifiable test. If you self manage short-term rentals it's well within reach. 

I would not advise to steer clear of this test based only on you having a job. It's a facts based test. Did you or did you not meet 500 hours of material participation as needed? 

I have a few questions- 

"We started an LLC" "We purchased a property"

Who are the legal owners of the LLC? 

Does the LLC legally own the property that was purchased? 

And @Michael Plaks is correct that setting up in GA didn't avoid the CA LLC fee. 

You are now a foreign entity doing business in CA since YOU run the business from there so Cali wants their $800 either way.

So whether you need a REI tax pro is all open to interpretation. Is this 1 flip where you're going to lose $20,000 and never touch real estate again? Then no.

First flip with good margins and intending to do more in the realm of real estate? Find someone now. 

 Hi Chris- That would just be standard wiring then. 

Unless it required specific cable to be run only to run that piece of equipment does it qualify.

 Wiring for special purpose equipment would be like having to install 250V wiring to run a commercial walk-in freezer. 

What special purpose equipment do you have for an ADU/Office that required unique wiring for it to function?

Hey Jason, 

You have two different situations here. 

A rent-to-own type situation and also a sublet/ property arbitrage. 

In a situation where you were doing an arbitrage (renting it from the owner, then yourself re-renting it to someone else) your costs to renovate/fix it up while you're using it would be able to be capitalized and depreciated by you once your rental was in service (available for rent to others). 

If you're buying it shortly and THEN after you own it will it be ready and available for rent-the costs will be capitalized and accounted for with the basis of the property as well (when you eventually buy it). 

So really the question is- when is the rental going to be in service? Before or after you actually own the property? And how long until you own the property?

 I love when the court is extra sassy in response/summary. One of the REPS cases (I forget which off hand) they were basically like...petitioner states they spent 8 hours on X date supervising painters at the property and we find it highly unlikely that anyone would sit and watch paint dry for 8 hours.