All Forum Posts by: Natalie Kolodij

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. 

This is correct. 

The best way to think about it is you're in the business of renting a property-that business isn't operational until it's ready and available for rent (aka in service). 

So you don't have a business yet, and current deductions yet. 

Also -without an in service rental, you have no schedule on your tax return on which to deduct those expenses. 

Additionally, most of the costs to make an asset ready for it's intended business use are capitalized and part of the cost of the asset. 

Example: If a business buys an oven and it costs $5,000, and $1,000 for installation and setup, and $200 of delivery and transport fee. 

The business would have an asset it was able to depreciate in the amount of $6,200. 

As the tax code is concerned all of the costs to create your rental property business (buying it and making it usable for it's intended use) and one in the same. 

Keep track of those costs this year, they come into play in 2025 when it's in service. Some costs MAY qualify as startup costs if the rental rises to a qualifying trade or business level under 195 as well. (more legal fees, business fees vs. renovations).

Research Points: 
§1.263A-1T
§195(c)(1)





Ervin E. Mears v. Commissioner, (Tax Ct. 2013)