All Forum Posts by: Sam Dangremond

I'm still BRRRR-ing right along.

Hello,

I have an obscure accounting / bookkeeping question I'd love some help on!

Namely, when using a 3rd party property management company, do I need to account for the tenant security deposit on *my* balance sheet?

With more detail: the 3rd party property manager collects the tenant security deposit from the tenant, and keeps it in an escrow account in accordance with all laws.  I never receive the tenant security deposit to my business checking account - I only receive the rental income, including when a tenant forfeits any portion of the security deposit.

My bookkeeper says I need to have a liability entry on my rental business balance sheet show that I owe the security deposit back to the tenant.  And I need an asset entry on my balance sheet, because the property management accepts the security deposit as my agent.

But that doesn't make sense to me.  I never touch the actual money.  The balance sheet entries should be on the property management's business, not mine - shouldn't they?

What do other investors who use property management do for this scenario?

Appreciate any thoughts and guidance!

would be happy to compare bankers here in Pueblo, will DM you

Aha, thank you - now I get it!!

Ok, I failed to tie the depreciation amount back to the purchase price made with the original capital contribution.  You can't ever get more depreciation than what you put in at the beginning.  

Thank you to all who replied, I am extremely appreciative!

Aha, now we're talking - thank you for your thorough reply!

Yes, I think I understand how the gain is outside the partnership. But doesn't *the partner* have to pay that tax nonetheless? When the partner takes out more cash once a zero basis is reached?

You're saying no, if *both* have a zero basis at the same time?

I guess my basic question is about how, over the long term, a rental property (or portfolio of multiple rental properties) can generate so much more cash flow than profits due to depreciation that the entire partnership basis is used up when that cash flow is withdrawn. 

Thank you for replying!

Yes, I think I understand what you mean about internal fairness between the two partners.

However, there's still a long term capital gain on the cashflow in excess of profits once the basis is "used up" right? This tax means that the net after-tax cash flow to each partner/investor is reduced, even though there's no disposition of the rental property asset?

I have a somewhat specific tax related question I'd like to see if anyone has encountered before.

(Standard disclaimers apply, you're not giving me tax advice or financial advice, just looking for general resources etc.)

Here's the scenario: a partnership owns one or more long term rental properties.  Each partner contributed say $100,000 to the partnership to purchase the rentals.  No leverage used.  So, each partner has a tax basis and capital account in the partnership of $100,000.  Then, each year the rentals give off more cash than profits because of depreciation - all normal stuff.

But here's what I don't understand: if the partners withdraw all the cashflow each year, then each of their tax basis will gradually go down (because they are withdrawing more in distributions than their share of the profits due to depreciation).  Eventually, the tax basis will hit zero won't it? And when that happens, apparently every additional dollar withdrawn is taxed at long term capital gains? 

Example:

Year 1 - partner's tax basis is $100k... annual partnership cashflow is $20k.... partner withdraws $10k in cash (half of the cash)... however the partner's yearly profits reported on K-1 are only say $5k... because the partner withdrew more in cash than his share of profits, his tax basis goes down by the other $5k.   Accordingly, after 20 years this partner will have a zero tax basis.... correct? Or no?

This means that eventually the cashflow itself is taxed as a gain, because the partner has "used up" all his tax basis?

Is my understanding correct?

If so, how does this interact with depreciation recapture, other long term capital gains, or anything else, at sale of the property or disposition of the partnership? 

Any guidance is much appreciated!

That is all correct!

@Joshua Zapin

That map is neighborhood quality.

Yes, I own single family residential.

Tough to judge how the pandemic is really affecting things. My personal feeling is that commercial office space will be hit harder than residential.

I’d recommend Realtors Mike Tripp, Jim Towers, or Chris Pasternak.

Until this virus situation hit, Pueblo was very bullish. Good economic growth on the horizon with expansions of the steel mill and economic development surrounding the riverwalk. Check out The Pueblo Chieftain for lots of news stories. Overall, Pueblo has much lower cost of living than Colorado Springs and Denver, so we’re seeing lots of in-migration from the rest of the state as well as from other states.

Hope that helps!

Here's a handy map:

https://imgur.com/312zggs

What else would you like to know?