All Forum Posts by: Stephen Nelson

Me too. Washington state and King County used to be mildly pro-business, allowed space for entrepreneurs and small businesses, and relatively light on taxes. No longer.

Just to add a handful of comments to those already shared.

1. Terrible shortages of tax accountants exist right now. Especially good ones. So, it's not a certainty you can even find someone worth paying. (Just to be clear, you probably can find someone who says they can do your return... someone who will charge you a seemingly reasonably price... but it'll be hard to find someone good.)

2. Most people should just use TurboTax or TaxCut and accept that, sure, they'd get better results from using a skilled accountant... but not enough to justify the cost. You do not want to pay $1,000 in tax prep fees to save $1,000. You want to spend invest $1,000 to save $5,000... or $5,000 to save $50,000.

BTW here's an example connected to your situation where a good tax accountant might have helped you optimize. So you're now renting your former principal residence. That means you're intentionally or unintentionally giving up or risking the Section 121 exclusion which would allow you to avoid tax on up to $500,000 of gain on the sale of that property. If you knew about this and considered the pros and cons of keeping the house as a rental? You're probably doing great with DIY. If you didn't know this and have missed out on saving tens of thousands of dollars of taxes? A good tax accountant would have really paid for their fees many times over.

The Washington state 7% capital gains tax doesn't apply to real estate. (It also doesn't apply to a bunch of stuff as well.)

Don't get me wrong. The capital gains tax is a stupid idea. But it targets the wealthy tech employees at Microsoft, Amazon, Meta, Google, etc.

Just because several people above in thread mentioned TN doesn't tax income?

Neither does Washington state.

There are way lower bars than 500 hours to achieve material participation. (The full list appears at Reg. Sect. 1.469-5T(a).)

Also if an investor hires a property manager? They lose their own property management hours. Just saying...

 Again with @Michael Plaks here. Make the error two years in a row? You've established your (incorrect) accounting method.

@David Charles Edwards, it rarely makes sense to generate earned income so you can contribute to something like an IRA.

Example: If you reclassify $100,000 of rental property income as self-employment earnings, you pay a 15.3% tax on most of the $100,000. (The actual formula is 15.3% times 92.35% of the $100,000 and the resulting payroll tax bill will be slightly over $14,000.)

That $14,000 of permanent tax savings will in almost all cases exceed the tax deferral an IRA or 401(k) gives you. (Note that tax deferral is only a delay in paying the taxes.)

P.S. An exception to the above general rule would be if you're a few quarters short of qualifying for social security... In that case, it might make sense to pay $14,000 for a year or two to get a $12,000 a year Social Security benefit for a few decades.

Here are my guesses but they're sort of shoot from the hip. Thus, consider them not as professional advice but rather as ideas to explore.

1. I think you've basically been in the real property trade or business of being a real estate developer or redeveloper in 2024 and maybe in previous years. So, there's a chance you are/were a so-called "real estate professional." (A chunk of tax law, Section 469(c)(7) creates this status. And law says if you spend more than 50 percent of your time and more than 750 hours working real property trades or businesses in which you materially participate, real estate isn't automatically passive.)

2. I think you need or needed to capitalize your development costs. E.g., if you bought a property for $100,000 and then over 2-3 years spent another $100,000 improving the property, what you do is think about that as a property that's actually cost you $200,000. If you place the property into service as a rental in year 4, for example, you plug $200,000 into your tax software as your cost. Not $100,000. (The $200,000 in this example would partly be land and partly improvements.)

3. You probably can use real estate losses to shelter your investment income. And that's true even if you aren't a real estate professional. Why? You'll be able to apply the "active real estate participant" rule from Section 469(i). Your income falls within the band that gets up to a $25,000 deduction from real estate losses. And that's enough to shelter your $14,000 of investment income. HOWEVER...

4. You'll probably be able to shelter your investment income with the $14,600 standard deduction too?

5. Final comment: As pointed out by every other tax accountant in this thread, you probably want to consider getting a tax professional's help with this. I'd guess once you start talking with someone, you and they will discover there are other issues to consider. Getting an extension now and then approaching a tax accountant after tax season is a good idea.

I agree with @Michael Plaks but it's possible the land arguably is a higher percentage of value than improvements.

E.g., a $500,000 property might be $100,000 of land and $400,000 of building... but it could also be $400,000 of building and $100,000 of land.

I think it's questionable as to whether you're running a trade or business. (That would be the trigger for the requirement to send 1099s to unincorporated vendors you're paying more than $600 to.)

I would also think you want determine whether the Section 280A rules about mixed use dwellings applies in your case. (TLDR summary of Section 280A: You don't get to deduct expenses of a personal residence except to the extend you have income.)

Note: Section 280A is also the chunk of tax law that creates the home office deduction and the Section 280A(g) exclusion which is better known as "Augusta Loophole."