All Forum Posts by: Natalie Kolodij

Like Michael said there's no way to know the answers without actually reviewing your taxes. No one will be able to confirm the treatment or what's best or accurate. 

Just to clarify-
Are you simplifying the amount to $19k for this explanation (But gave him an exact figure)....or did you put $19k on your line item to him but the receipts totaled $18,308 when he added them? 

Quote from @Brady Ascheman:

@Natalie Kolodij  so if you are a "Real Estate Professional" your rental becomes non-passive and the rental income is subject to SE tax?

 No. 

It becomes Non-Passive: True. 

Is Subject to SE Tax: False. 

Being non-passive does not mean something is automatically subject to SE tax. 

If someone has Real Estate Professional Status their rentals are non-passive. 

That doesn't mean they now pay SE tax. 

Quote from @Brady Ascheman:

Hi everyone, when meeting with my CPA recently I was instructed by here that if you obtain "Real Estate Professional Status" as per the IRS rules then your rental income become "active" instead of "passive" income in the eyes of the IRS. She then stated that when it becomes active income it is subject to the 15.3% self-employment tax. I wanted to get some insight from others on if this is true since I can't find a good answer on the IRS website, and if it is true why does anyone want to gain real estate professional status?

It's not true and you may want to find a different CPA. 

Having Dealer status subjects the income to SE tax; but even then it doesn't apply to the real estate dealer's rental income. (think flips, new construction etc.) 

Or providing substantial services in conjunction with rental activities can subject to SE tax (hotel like services...room service, daily cleaning, meals, free shuttles etc).

Being a REP just defaults the classification of the rentals from passive to non-passive. 

Non-Passive =/= Subject to SE tax by default. 

Passive vs. non passive is §469 and Self Employment Tax §1402. 

Quote from @Brian Dela Cruz:

Quote from @Charles Perkins:

Quote from @Brian Dela Cruz:

@Charles Perkins

I appreciate your perspective. For me, taking the CPA exam was a transformative experience—it taught me more than the 30+ credit hours I spent in college level courses on accounting, tax, audit, and business law. The exam not only deepened my understanding of the intricate details but also helped me see the big picture of how our financial system works. It sharpened my tax research skills, which have proven critical when I began handling accounting and tax matters for businesses and real estate investors.

Moreover, earning my CPA was just one milestone in my ongoing learning journey. I went on to acquire several other credentials both before and after becoming a CPA, driven by my desire to master every facet of the profession. And while my professional growth is important to me, I also balance the demands of a busy family life with my wife and four young kids.

Looking forward to more insightful discussions like this.

 I'm a retired CPA, have a master's in taxation and have over 30 years experience.  I've met some very highly specialized experts in low income tax credits, corporate accounting and tax, as well as tax resolution.  I performed audit work in low income housing.  My income tax experience is primarily in tax resolution and real estate accounting.  

Along the way, I have met many fellow tax preparers in office settings, continuing education classes, and other meetings.  I've also reviewed work done by both CPAs and tax preparers in large and small firms.

I'm constantly learning new income tax strategies, reviewing my understanding of tax legislation and opportunities that are created with new legislation.  I would never claim myself an expert.

If not you, then who? If you're not an expert with a retired CPA license, a Master's in taxation and 30 years of experience, then who is? If not now, then when? If you're not an expert by now, then when would you be? What would it take for you to become an expert?

 I think what Charles is getting at is a very important idea that there is always more to learn and to me maintaining that mindset and humility makes someone much better in their field. 

There's a saying around recognizing the difference of someone with ten years of experience with someone who has one year of experience they've repeated ten times. 

And unfortunately that's very true with many professionals; after those early years of learning they stop growing, learning, developing, become set in their ways, etc. 

Someone hanging their hat on having done something for 20 years, or having passed a very hard exam 20 years ago doesn't mean they're an expert. They may be an expert; but those 2 facts aren't what can/will determine that. 

I worked for a CPA firm where the partners with 20+years of experience each hadn't taken a CPE class in years. They made staff sit through webinars to get the CE credits needed to maintain their licenses. They have a CPA license, 20+ years of experience and their name on the door but they stopped being an expert when they decided what they knew was enough and they were done learning or staying up to date on tax law. 

Quote from @Stephen Nelson:

Quote from @Natalie Kolodij:

Qualifying for a short-term rental to be non-passive doesn't give you REPS. It gives you a non-passive short-term rental. So losses from that specific rental may be utilized. 
 

I think a better way to say this is, if a rental property is a short term rental (meaning the average rental interval is seven days or less) it's not a rental. That matters because rentals are often automatically passive.

That also means the taxpayer uses the material participation rules from 1.469-5T to determine whether the STR is passive or not.

Having an average guest stay of 7 days or less breaks it out of the definition of being a passive rental under 469. This is what makes it non-passive. 

The material participation has nothing to do with it being non-passive; it's the requirement allowing losses if an activity is non-passive. They are independent. 

Quote from @Pavan K.:

Quote from @Natalie Kolodij:

Several notes: 

1. $50k land value on a $600k property sounds very low / possibly incorrect 

2. That price for a cost segregation study is on the high end for a single family home 

3. "I would need to get a cost segregation study done  in the first place" Need to get it done for what? 

4. Without a cost segregation you depreciation the building value of your property across 27.5 or 39 years. It's not required in any way. 

With a cost segregation study your building value will be broken out into many detailed components which will have lives of 5,7,15 and 27.5/39 year  lives instead. Allowing you to accelerate some of the depreciation. (and utilize bonus depreciation on the assets with lives of 20 years or less)

5. Possibly most important: can you utilize any losses generated by the rental property? Or will you be subject to the passive loss limits? 

Without a specific use for losses generated; utilizing a cost segregation study to generate large losses you can't use won't benefit you. 

- Are you or your spouse an IRS real estate professional? 
- Is this a Short-term rental? 
- Do you have other passive income sources? 

-Is your Adjusted gross income under $100k which would allow you to use some amount of passive losses?

Thank you Natalie.

1. $50k land value on a $600k property sounds very low / possibly incorrect.  " 

"This is a new suburb,mostly farmlands ,converted to residential zone . I did check county records for the land value."

2. That price for a cost segregation study is on the high end for a single family home. 

" Noted. I'll shop around,when its time " 

3. "I would need to get a cost segregation study done in the first place" Need to get it done for what?"  

    " I might have understood it incorrectly. The study needs to done for tax filing purposes?"

Unfortunately, we don't qualify for RE professional and this is a long term rental. Was hoping to find if cost segregation could offset or reduce tax liabilities on W2 income , which looks like it won't unless we are RE pros or it's a short term rental. Kind of in the higher tax bracket and finding ways to reduce our tax burden .

Not needed for tax purposes or really recommended unless there is a specific use for generating losses. 

You can't use the losses against your W2 income-so generally a cost segregation study won't help you. 

And on the land value- is $50,000 the amount the county had listed? 

You'll want to use the same % ratio between building and land; not the actual amount/value listed. 

Several notes: 

1. $50k land value on a $600k property sounds very low / possibly incorrect 

2. That price for a cost segregation study is on the high end for a single family home 

3. "I would need to get a cost segregation study done  in the first place" Need to get it done for what? 

4. Without a cost segregation you depreciation the building value of your property across 27.5 or 39 years. It's not required in any way. 

With a cost segregation study your building value will be broken out into many detailed components which will have lives of 5,7,15 and 27.5/39 year  lives instead. Allowing you to accelerate some of the depreciation. (and utilize bonus depreciation on the assets with lives of 20 years or less)

5. Possibly most important: can you utilize any losses generated by the rental property? Or will you be subject to the passive loss limits? 

Without a specific use for losses generated; utilizing a cost segregation study to generate large losses you can't use won't benefit you. 

- Are you or your spouse an IRS real estate professional? 
- Is this a Short-term rental? 
- Do you have other passive income sources? 

-Is your Adjusted gross income under $100k which would allow you to use some amount of passive losses?

Maybe we could stop using CPA and tax expert interchangeably? 

I have tax clients who are CPAs, I amend many returns prepared by CPAs, Many CPA's don't do anything related to tax. 

Enrolled Agents are licensed and tax specialized; and some uncredentialed preparers can run circles around some CPAs or EAs. 

I absolutely agree there is a huge difference between someone who is a data entry "preparer" and someone who is a skilled technical tax professional. 

That doesn't break down to "data entry" vs. "CPA" though. 

There are several things that come into play with determining if a property sale is capital gains or ordinary income. 

Intent is one of the biggest ones, frequency is another. 

They are known as the Winthrop Factors-

1. The purpose for which the property was initially acquired
2. The purpose for which the property was subsequently held
3. The extent of improvements made to the property
4. The number and frequency of sales over time
5. The extent to which the property has been disposed of
6. The nature of the taxpayer’s business, including other activities and assets
7. The amount of advertising/promotion, either directly or through a third party
8. The listing of the property for sale through a broker
9. The purpose of the held property at time of sale; the classification as an investor or dealer is determined on a property-by-property basis.
   
   
   
   To me intentionally buying a property to renovate it to resell it for profit, twice in the same year, and opened an entity to do it in ....is going to be ordinary income and not capital gains. 
   
   
   

You've gotten a great response above from @Michael Plaks 

I'll also note that for this or any similar "strategy" people come across to just step back and ask the following: 

Does this have a genuine profit/business motive? 

If the answer is no, and the only goal is to sidestep some ability to deduct something, or be able to deduct a non-deductible personal expense ....assume it's a no-go. 

I clean my own house, can I bill myself for that and then write-off all of my cleaning supplies against it? 

I cook my own food, can I bill myself for that and write off all my food costs? 

I painted my own house, can I bill myself and then write off all the paint and supplies? 

Do I clean, cook, or paint for anyone else for profit? Nope. No business motive.