All Forum Posts by: Ryan Wilson

CPA question.  I am going to make up some easy numbers for thought experiment for a tax strategy, in my head for the future, but thinking I am missing something. 

Business owner (Joe) sales a small business ( not real estate related) and has long term capital gains of $1,000,000 in January.

Joe loves real estate and wants to buy a large multifamily for longer term income.  Joe buys a property for $2,000,000 and does a cost segregation study and gets a large first year depreciation loss of 25% or $500,000. Joe profits $100,000 from income from the property for the year.  Typically Joe would only be able to use $100,000 depreciation to offset the $100,000 income from that property (passive income) and possibly a very low amount based on income towards regular earning.

Taxed on $1,000,000  capital gains only.

Now, Joe also decides he love real estate so much he wants to become an agent, and Joe puts in enough time the same year of selling his business to qualify him as a "real estate professional" by IRS standards and makes $100,000 selling real estate.

What I can not seem to clarify is, now that Joe is a "real estate professional" in the same year he sold the business and had a large long term capital gain, can Joe use the remaining $400,000 loss from the property because as a "real estate professional" your losses are not limited to only offsetting  passive losses?

$1,000,000 capital gains - $400,000 loss from property + $100,000 earned as agent = taxed $700,000 capital gains   ????   Or

$1,000,000 capital gains + $100,000 earned as agent - $100,000 loss from property ( limited to income in real estate)= taxed $1,000,000 capital gains ???

I am looking for clarity on what losses can be used as a qualifying "real estate professional"?  I think this could be a good strategy, but never heard it talked about, so I am sure I am probably flawed somewhere within the tax code for income classifications.  Help me understand.

Thanks for your thoughtfully clarifying responses in advance,

As @Joshua Ferrari said it is hard to do cash out, especially on a property that does not already have a mortgage ( does not make much sense to me, but found out the hard why, when I bought a property cash at auction and then could not get a loan), but you could probably get a HELOC and pull that money out and then down the road refinance that into a traditional mortgage ( I am assuming,  lenders please correct me if I am wrong, for both of our knowledge).

Short answer is yes, because the way I figure it is there is a certain expense of lost rental income, improvements a "owner user" may want vs "as is" which is "nice for rental property", plus if I can possibly avoid the traditional real estate commissions, and everything else.  I realize it may be a discounted price, but definitely not willing to give it away.

A lot would depend on your long term goals, condition of property, long term outlook on the property, and other factors.  My thought would be if it is a good property and decent area with long term potential, you might consider keeping the property but pulling some of the equity from the property and use that as a down on additional properties, if you want to purchase additional properties.  Based on the numbers it would probably still cash flow pretty nice, and avoid the selling costs and taxes ( assuming there is profit). 

I have a SFR in Hesperia CA since 08 and great tenant in place for 4 years, that is about to sign another year lease. I want renew their lease, even if it limits who I can sale to, even though I know I could sale it easier to someone that wants to live in it, but because they have been perfect tenant and love the house, I will not send them packing. However I am strongly considering selling the property, if I can sell to another investor and keep them in place. I wanted to see what everyone's thoughts are on best site to list to sale to another investor to keep the tenants in place? Thought about checking into Roofstock or similar. Property value (zillow $255,000) $1450 rent, so I know it is not like buying property in other markets, but for CA there may be some interest.

Has anyone sold through Roofstock or Zillow Offer or others?  Or should I just reach out to a local agent and go the traditional route?  

I use cozy just for collecting monthly rent.   So far it has been great vs before having to collect a check and deposit each month.  I get an email when the rent is paid to Cozy then a couple days later a second saying it was deposited to my account.  There is a couple day delay but to me that is no problem.

I currently am under contract on my first multi (8 unit) in OKC.  Looks like a pretty solid deal, full occupied, and with conservative numbers should be about 8 cap.   But of course if things go good ( low vacancy, low cap ex., slight rent increases) I could see much better returns.  However, there does not appear to be a whole lot of opportunity to push rents up even with some improvements.  

Although, 8 cap makes for decent cashflow on the unit, and it will be managed by a good PM team, I am just questioning if I should just invest in a good syndicator and should be able to get near the same returns without the need to own on my own. This is not a high appreciation market, so it would be for cash flow. Also, since I don't feel I can push rental rates much, I probably won't be able to BRRRR, so my money is tied up either way.

I am excited about the deal, but since my first multi and out of state I am questioning everything and trying to make sure I am looking at all options.  

I appreciates all of your feedback.

Thanks

A little late to respond but just say the post and thought I would throw out my thoughts if your still interested. I live and grew up in Hesperia/ Oak Hills. I currently have 1 SFR rental, in Hesperia that does well but only because I bought it 10 years ago, half price of current value To me the prices seem very high from what I have seen traditionally over the years, and I am personally worried that they are currently overpriced and questioned whether I should get out on top. But, as others said the other local IE markets are about double the High Desert values so that could help maintain the high values. Rents are starting to rise but, you will not get anywhere close to the 1% rule up here, on normal sales, from what I see. I would like to invest more but just not sure which way to go.

@Kristina Heimstaedt

@Alexander Felice

Thanks for the replies. So purchased a rental 10 years ago and have just dumped all payments back into paying down the loan. Hindsight might not be the best move. Now thinking about using that equity for more investments. Called and was surprised by the rate of a cash out refi , even at 75% LTV. Thought about setting up a Heloc ( if available, haven't checked). Then if I opportunity comes my way I can purchase essentially "cash". Then do a refi on the original property, but since it is paying off a loan that's essentially tied to the property, would it be a cash out or just a refi consolidating 2 loans? Then BRRR.

Didn't know if any loan folks would be able to answer that.  Thanks

Wanted to know if there is away around the higher refi rates on a cash out. My thought is to get a HELOC, pull the cash, and then do a 1st refi, to pay off the HELOC. Would paying of the HELOC still be considered a "Cash out Loan" ?

Or is it just best to do the "cashout refi" and then shortly after try to refi again to a lower rate (if rate /cost makes sense)?