All Forum Posts by: Nicholas Aiola

Welcome to BP, Albert Diodonet ! Good luck on your quest to dominate the real estate game!

I agree with @Natalie Kolodij - definitely a good idea to ask if your CPA invests, too, and to test them on their real estate knowledge as it pertains to taxes.

I also agree that an LLC is generally an all around good legal entity to hold real estate.

Another good question to throw at them is if you can do a 1031 exchange on a flip. Or if profits from a flip are subject to self-employment taxes. 

The CPA you're meeting with better be prepared for a taxing (apologies for another pun) interview!

And he also better love dogs...

Hey, Matthew Otero I always encourage clients to make a list of goals and what they would like to achieve in the next year or two, or five, or ten, etc. This helps align interests and make for a better foundation (pun intended) to the business relationship. After all, your CPA is part of your TEAM, and should be working with you to help achieve your goals while keeping that tax bill low. As you make this list, you will begin prioritizing what's most important to you and, as you go through it with your CPA, questions will certainly arise. Hopefully, your CPA will be able to answer them and offer some insight. Most importantly, you want to make sure he or she will be the best fit for you guys! Best of luck :)

Bob Smith First off, kudos to you for reviewing the returns and catching the errors. Personally, I love when my clients double check the returns. It sounds like you have a healthy amount of tax info and filings. In any case, mistakes are bound to happen, of course. Mistakes are one thing, but consistent mistakes are another. Speaking from experience, it is much more likely to make a mistake if tax documents and other info are handed in haphazardly and late. If a client delivers detailed, timely, well-organized docs, there should be no reason or excuse for material errors such as the ones you described. It could be a result of delegation, but even if that were the case, there should be a review process. Just like the others who replied, I'm curious as to how your CPA reacted when you pointed out the errors. At the end of the day it's about working with whomever you feel the most comfortable and who provides the most value for your hard-earned money. If neither of those apply, it's time to shop around!

Definitely practical, and totally worth it (in my opinion)! It also is a matter of personal preference... If you want to manage your first few properties on your own to get a feel for it and for a learning experience, that couldn't hurt.

But my one piece of advice would be to ALWAYS budget for the cost of a property manager when running the numbers before purchasing a property, even if you don't intend to use one. Why? Because maybe someday in the future you may decide you don't want to manage it anymore. If and when that day comes, then you'll know you have the room to absorb that cost.

Best of luck to you on the road to becoming a REI!

@Daniel Ortiz - Thank you for the mention and kind words!

@Neel Shah - @Ann Bellamy makes a great point: you need a CPA on your team who fits best with you & your business, and who you feel the most comfortable with, regardless of where he or she is located. I work with many real estate investors, both locally and remotely. Good luck with your search, and don't hesitate to reach out with any questions! 

Hey, @Jim S. ! I'll echo Lance in saying it is definitely super important to start working with a CPA sooner rather than later. With that said, I'll be happy to address your questions...

1. You should DEFINITELY post an ad on Craigslist or wherever you intend to advertise before doing any work on the property. As long as the property is advertised for rent, you can deduct allowable expenses as rental real estate expenses, as opposed to lumping them into start-up costs.
   
2. If you are not advertising the other rooms for rent and are not planning on renting any rooms out in 2017, no rental real estate deductions can be taken, including start-up costs. If it will be advertised and rented out, you would be able to deduct 80% of relative expenses (assuming you will only be occupying one out of the five rooms). Keep in mind that you are allowed to expense the first $5,000 of start-up costs only if your total start-up costs are $50,000 or less. After that, the $5,000 allowable expense begins to phase out.
   
3. Again, as long as the property is advertised for rent and you fully intend on renting the other rooms out, you can deduct the allowable expenses in 2017. Now, this doesn't mean you can advertise the rooms for ten years, never actually rent them out, but still claim rental real estate tax deductions year in and year out; but in your current situation, it makes sense - given that there is a little over a month left in the year and you are doing some work to the property, it makes sense that you may not be able to rent out every room by year-end. Your personal use would be 20%.
4. Generally, mileage and local transportation expenses incurred when tending to rental properties are deductible. One exception to the deductibility of driving from your current apartment to the new house would be if you don't have a home office in your current apartment; if you don't have a home office, the IRS considers trips from your current home to a rental property to be "commuting", in which case the mileage is not deductible.
5. Tools and supplies are generally deductible expenses. If you are buying tools and supplies for repairs and maintenance that will only be done in a "rental" area/room in the house, you can deduct 100% of those costs; if it's for both a personal and rental area of the house (e.g., common area, bathrooms, exterior, etc.), a portion will be considered nondeductible since the repairs and maintenance are for you, personally, too.

Hopefully, this helps and good luck with your new house!

Hi, @Larry H. !

To echo some other responders, every situation (and CPA) is different. Personally, I don't charge my clients for answering normal, routine questions they ask (I would consider your question normal and routine) for two reasons:

1. I would hate for my clients to feel as though they can't reach out for advice for fear of being charged. After all, advice is part of the reason they hired me!

2. I'm a question asker myself, and I encourage questions. If you don't  ask questions, you're not going to find out what the answer is, right?

With that said, like @Nathaniel Busch and @Daniel Hyman said, some questions require complex and time consuming answers. If that's the case, your CPA should clearly dictate the amount of work required and amount to be billed, if any.

If you feel unsure as to whether or not you will be billed for certain questions going forward, I would suggest––you guessed it––asking more questions: "Should I expect to receive a bill for your time in answering my question(s)? If so, what is the estimated fee?" If nothing else, this will quantify how bad you want the answer!

Hope this helped,

Nick

Hi, @Jeff Piscioniere ,

@Brandon Hall 's post is right on the money - the House's tax proposal could mean the beginning of self-employment tax on rental income, but not all rental income.

First, you'd have to actually report net taxable rental income (after depreciation); net losses (including depreciation) would not result in any self-employment tax.

Second, you'd have to be conducting a "trade or business". This is not specifically defined in the tax code, however. To answer your question, net taxable income from vacation rentals and other short-term rentals that you are active in on a day-to-day basis most likely would be subject to SE tax if this part of the bill passes.

Fingers crossed that this part gets the ax, otherwise it could mean bad things for a lot of RE investors.

Happy to hear what everyone else has to say on the subject.

Nick Aiola, CPA

Originally posted by @Arthur Voskanyan:

How is rental income taxed? For example if I have multiple investment cash flow properties and when tax season comes. Is the total income whether vacation rentals/ long term rent, taxed as regular income tax based on whatever tax bracket you fall into, or is it taxed as self-employment tax which is taxed generally higher? Thanks guys in advance.

Arthur Voskanyan

 Hi, Arthur!

Assuming you operate your rentals as an individual or through a pass-through entity (sole proprietorship, LLC, partnership, S Corp), rental income is taxed at your ordinary rates (based on your tax bracket). Self-employment tax, which is a tax in addition to ordinary income tax, does not apply to rental income.

There are special rules for vacation rentals, however...

If it is your vacation home and you use it personally, the IRS allows you to rent it out for up to 14 days, tax-free!

If it is a vacation home that is primarily rented out and used personally on occasion, your deductions may be limited. If you use your vacation home personally for more than 14 days or more than 10% of the total rental days for the year (whichever is greater), some of your rental expense deductions could be limited. 

See two examples below:

1. If you rent out a vacation home for 100 days out of the year, you will be allowed to use the vacation home for up to 14 days of personal use and still deduct 100% of allowed rental expenses. In this case, 14 days > 10% of total rental days (100 x 10% = 10).

2. If you rent out a vacation home for 200 days out of the year, you will be allowed to use the vacation home for up to 20 days of personal use and still deduct 100% of allowed rental expenses. In this case, 10% of total rental days (200 x 10% = 20) > 14 days.

Hope this helps!

Nick Aiola, CPA