All Forum Posts by: Paul Caputo

Charitable remainder trusts are a great strategy for eliminating capital gains. They're complicated to structure and in the end whatever remains in the trust goes to a charity, hence the name. It's best to pair this with something that mitigates the financial loss to the charity like a significant whole life insurance policy. 

Definitely a great little known advanced tax strategy, but the complexity and cost make it an unlikely option when dealing with single family houses like the average investor. If you're selling because you need all the cash now this will not do that since the distributions must be taken over a period of years, and at least 10% has to go to the charity. 

It does have a significant advantage over the more commonly used 1031 exchange to move cash into a new property without paying taxes on the sale since the 1031 just defers taxes while the CRT eliminates them. But every advantage has a disadvantage since if holding property until death it goes to your heirs with a 1031 and to the charity with a CRT so depends what you want to do. 

Very complicated! A super savvy tax attorney as well as a solid long term plan is needed to make that work.

Generally no that wouldn't qualify. First off section 179 does not apply to rental property. I'm assuming this is a rental because you said 27.5 years which is for rental property and not 39 years which is for commercial property. 

On the bonus depreciation also it generally wouldn't qualify. Hot water heaters are necessary for human comfort so they're considered part of the real property, not tangible personal property. Even though it's not gonna last for 27.5 years it has to be there. When you replace it in 10 years you can write off the rest of the remaining depreciation and retire the asset to avoid recapture. In the highly unlikely event that you have multiple water heaters in the building any that are specialized for a specific purpose would qualify for bonus. I've never seen that in a rental property.

That being said there's a bunch of assets in rental property that do qualify for bonus depreciation. 

Now would be a good time to replace stuff, but the next 5 years have 100% bonus depreciation. Also it's best to do things because they need to be done not because of tax benefits. Tax benefits are great, but if you don't need to spend $10,000 on whatever a $3,700 tax benefit (at the top rate) for spending that $10,000 doesn't really make sense. 

Section 179 is currently maxed out at $1mm on up to $2.5mm in qualifying assets purchased and phases out after that. At $3.5mm qualifying assets purchased it's gone. It's not per property, it's the business as a whole. It doesn't apply to rental property, but it applies to almost everything else in running a business. So if you buy a car, computer, equipment, software or most other things for your business it applies.

There's no cap on bonus depreciation. 

There are a few problems with trying to DIY with depreciation deductions in real estate. First off there are no bright-line tests everything depends on the facts and circumstances of the assets. There's are 6 factors meant to test the permanency of every asset, which are used to figure out if they qualify for short life treatment. 

If you're rehabbing a property the proper thing to do is fully expense any remaining depreciation on everything torn out and then start new depreciation clocks on all the replacement assets. If you don't have everything documented before tearing it out that's not possible. The old assets are still entangled with the property so you're technically depreciating assets that aren't there anymore, which obviously isn't allowed. 

Also there's no way to get everything that qualifies other than having it done right by a qualified construction engineer specialist. We've reviewed over 100,000 depreciation schedules on real estate not done by a qualified specialist. None of them were 100% correct.

All this really only applies if you're holding the property. If you're doing a fix and flip there's no depreciation, just like there wouldn't be a section 179 deduction if you were just buying equipment to resell it.  

Sounds like I should take a look at KW, and talk to some more brokerages in the area. 

Thanks guys!

@Michael Brattelli That's what I'm thinking at this point. Start residential and learn everything I can about commercial and transition into it. Looks like the big firm (it's Re/Max, btw) will be a good bridge since they do both. Neither of these I was talking about do a split, there's monthly fees and a small per transaction fee, other than that I'd keep all the commission. Training is important to me too and looks like the training is way more substantial at RM. 

Things are a little different in Colorado, there's no salesperson license only the broker license. It's 168 hour education before you can take the exam. Then it's working two years at a brokerage before you can be independent or start your own firm. Around here some just do a split with no fees, some do monthly fees and no split and some have monthly fees and a split. 

@Matt M. I was living in Boulder, but moved down to Edgewater a few months ago. Planning on moving back to Boulder later this year. That makes sense as far as calling and bugging them until they say ok and let me in. It's the squeaky wheel that gets the oil right? They all say NO CALLS PLEASE so I've been hesitant to call everyday and knock down their doors because of that. But I do suppose doing that will show the initiative needed to succeed in the industry. 

The commercial guys at RM are doing it full time and doing well. I see you're with a different RM office so I'm guessing you like the company. Any insights? And on the monthly fee they have options. They waive it the first 3 months and the option is to either go with the full fee and no split or a reduced fee, about half the full fee with a split until switching over, that might be the best way to go. 

Thanks guys! Lots to think about.

@Kristi Hill That was very nice of you! But as @Dave Foster and @Jon Holdman stated you're in for a big tax bill on it. If you haven't taken depreciation the IRS will still hit you for it. The way to fix that is filing Form 3115 which lets you catch up on missed depreciation. In that case the depreciation would be a wash unless your marginal tax rate is over 25% and then you'd actually get more tax benefit from the depreciation adjustment than what you lose on recapture since it's capped at 25%. 

If you plan on buying another rental property definitely look into a 1031 to avoid the recapture and capital gains.

@Will F. The 100% bonus depreciation is in the new tax law. It applies to short life assets placed in service after 9/27/17 and before 1/1/2023. There's been some level of bonus depreciation for most years since 2001. To really take advantage of it you'd need to do cost segregation on the property since there isn't really a list of what qualifies and what doesn't. It's more complex than that. You could have the exact same asset installed two different ways and one way it would qualify as 5 year and the other it'd be long life. 

Flooring depends on what it is and how it's installed, some qualifies some doesn't. Carpet generally qualifies as do appliances. Fixtures depend on what they are. Basically things that are necessary in the building or structural are long life and things not in those categories are short life. Land improvements have a 15 year life so anything outside the building that isn't attached like landscaping, sidewalks and signs would qualify. 

It's complicated that's why there are firms that specialize in depreciation like mine. 

When pairing bonus with section 179 it's important to put everything allowable under bonus to free up more dollars under section 179 to maximize the overall deductions.

I recently passed the CO real estate broker exam and I'm trying to decide what brokerage to join. I live in the Denver area which is one of the hottest markets in the country both on the residential and commercial side. I want to get into commercial real estate brokerage, but all the commercial firms I've tried to contact haven't responded to my resume. I'm guessing this is because I'm a new agent with no commercial brokerage experience. This puts me in a bit of a catch-22, how can I get commercial brokerage experience when none of them accept new agents? 

I want to start in commercial since that's my main interest. I'm well versed in tax strategies for commercial property and know that will give me an edge. I've also spent the past two years trying to learn everything I can about investment and commercial property. I feel like if I go into residential and just sell houses I'll be selling myself short and pushing back my timeline on getting well versed in the commercial property business. 

I've reached out to several commercial brokerages with no luck. I'm starting to think I'll have to just start doing residential and work my way into commercial. I don't particularly want to do that, but I gotta start somewhere.

I've got two brokerages that want me to join them: they're quite different and not really what I want as far as commercial business. I really like the people at both of these brokerages, but I don't know what to do.

One is a local boutique firm. They have super low fees and the monthly fee includes everything to do the business. Only thing beyond that would be the Realtor board fee and whatever I spend on marketing myself. Their main focus is residential, but they do a few commercial deals, less than 5% of their overall business. Being a boutique they don't have 100's of hours of online training or anything like that, but they really sold their mentorship program as being great for new agents. Their best agent did 20 transactions last year, and the average is around 5 transactions per year.

The other is a big national firm. The fees are quite a bit higher and don't include all the things needed to do the business like the boutique firm. I'd be paying about $900 per month more just on the fees not to mention about $100's per year more on the business necessities. They do some lead generation to help new agents, which the boutique firm does not. They also focus on residential, but they have a commercial division. So I see that as a bit easier to start residential and move into commercial. They have an extensive training program that includes 100's of hours of online training as well as a mentorship program. Their top agents do over 50 transactions per year, and the average is about 14 transactions per year. 

The big firm has about 5 times as many agents than the boutique firm so the numbers may be a little skewed. The splits are basically the same, basically no split which I like. The boutique has a $10K max on fees. The big firm doesn't have a max, but all things considered I think I'll end up around $15K-$20K in fees there.

I'm looking for some advice here on what I should do. I never thought picking a firm would be so nerve racking! Any advice would be greatly appreciated! Do I go with the boutique that has way lower fees but also way lower production, or do I go with the big firm with high fees and higher production? Or do I keep holding out looking for a strictly commercial firm that will train a new agent? 

Long term I want to be investing in commercial real estate with a focus on multifamily properties to build up passive income to supplement my business income. 

So if you're an old pro, been an agent for a few years or even if you're just starting out like me I'd appreciate some insight. As my post title says: What should I do??

@Jack B. The thing here is non-qualified use is only disregarded after qualifying use as long as you still qualify for the section 121 exclusion. That does not appear to be the case here. 

You lived in the property, then rented it for over 3 years so you lost the exclusion. Then after moving back in you'd have to live there for 2 years to regain the partial exclusion due to the non qualifying use on the front end. 

If you first lived in the property, then rented it out for LESS than 3 years and moved back in you'd qualify for the full exclusion. 

The exclusion amount doesn't change: that is if you moved back in and re-qualified you can claim the full exclusion up to the ratio of non-qualifying use. If you have 3.5 years of non-qualifying use and live there for 3.5 years after for qualifying use and sell for a $500K gain your ratio is 50% so you can take the full $250K exclusion. If you sell for $400K gain your ratio at 50% gives $200K exclusion. If you sold for $550K gain you'd max out the exclusion at $250K and have $300K taxable gain. Make sense? That's for the single $250K exclusion but the idea is the same if married. 

In your case you'll have to re-qualify for the exclusion and when you sell it'll be the ratio between NQU and QU up to the limit which you'd probably have to live there awhile to get up to that. Of course depreciation is recaptured to the extent allowed or allowable.

I'm not a CPA, but that's how I read the tax law and it looks black and white to me. Any thoughts @Linda Weygant and @Ashish Acharya?

I'd say take Dave Ramsey with a grain of salt. He's a smart guy and understands how money works, but most people he counsels on his show have a lot of stupid debt, not smart debt. There's a big difference. Stupid debt is a sunk cost such as having 2 cars on 6 year payments that you can't afford. You're never getting that money back. Smart debt is in assets that pay for themselves and then some allowing you to invest in real financial freedom. 

It's tough to say what to do or what not to do because every person's situation is different. You have to look at the opportunity cost, what's the best return on your cash all things considered? How long are you going to hold, how much interest are you going to pay over that period and perhaps most importantly is the cash going toward something that you have to pay for or something that will pay you? You have to pay for your personal residence while an investment property will pay you.

Sounds like your new friend was a bit over-leveraged in the crash and paid for it in spades. Learn from his experience, but don't assume you'll make his mistakes. Be smart and look at the numbers. Plan for the downturn because it will come, but don't let that scare you out of starting. Play your cards right and you'll be prepared for it and be able to weather the storm. 

Remember the only people who lose money in a crash are those that sell. Hold on and the market will return just like it always has. You just need to be smart about it and go from there.