All Forum Posts by: David Orr

This is an old thread that was revived with the recent reply, and re-reading it now, I want to correct a couple things.  What I said in an earlier comment about "section 179 can't be used to create a business loss", that wasn't entirely accurate/complete.  The loss created by section 179 is limited to your total net taxable income amount from all "active" business income you have, plus any W-2 income.  So you can have section 179 losses for your rental even if the rental isn't generating positive taxable income, as long as you have other active income.  Note that active income isn't the same thing as non-passive income, it's lower bar that just requires that it's a business activity that isn't just entirely passive.  But the rental too does have to meet the "active conduct of a trade or business" threshold, which does mean you wouldn't qualify to use section 179 if you have a rental that is managed entirely by someone else and you aren't at least overseeing it and making decisions about the management of it.

I mostly disagree with the reply suggesting that you need to have an LLC to take the section 179 deduction. An LLC is potentially one minor factor that might contribute to the evidence that you are running your rental activity as a trade or business, but it's definitely not required that you have an LLC to qualify. That comment also seemed to imply that you don't report the rental on Schedule E if you have an LLC, but that's not correct, with a single member LLC it still goes on Schedule E.

"I use a schedule E and do not have an LLC or business name, so can I purchase the vehicle under my personal name and take section 179? The vehicle is over 6000 pounds GVWR and will be used nearly entirely for business (going to current rental and searching for new properties to acquire)."

It's fine that it's on schedule E and not in an LLC. The are some specific limitations on SUVs and crossovers even if they're over 6000 pounds, so you should make sure the particular vehicle qualifies.

"A second question is if I finance the car purchase can I also deduct the business use portion of the interest charged on the loan?"

Yes, you can deduct related expenses including gas, loan interest, insurance, etc. using the actual vehicle expenses method to deduct auto expenses for your rental or other businesses. 

Yeah.  Any time I have a client who did their bookkeeping for rental properties with QBO, it's it's always a lengthy process to try to sort it out.  The categories (accounts) are pretty much always a mess because everyone sets theirs up differently.  But even after we get everything organized, it's still just so annoying to use so slow (pages load slowly and every click on a report results in a pause while it fetches data, it's just tedious).  

I've moved move of my clients who used QBO to Baselane (or Stessa), and it's vastly simpler, faster, and easier for them and for me.  Of course, for other types of businesses, or rentals in a partnership, accounting software like QBO, Xero, or Wave is still a necessity. 

@Michael Plaks @Sean Graham

I had to do some research on this after reading the other replies in this thread because my understanding of the nuances of 1031s isn't as thorough as my understanding of some other real estate tax topics.  So my answer isn't entirely just off the top of my head, but this is my current understanding of it.  The article https://www.thetaxadviser.com/newsletters/2021/feb/final-sec... is one source of helpful info on this topic. 

A 1031 exchanged property can include 1245 components that are considered part of the "real property" for 1031 purposes if they're affixed to the building (and also up to 15% of the value can be personal property under an IRS rule, such as appliances). 

If the replacement property has at least as much value in 1245 components, then section 1245 recapture isn't a problem, you can defer the recapture of the 1245 depreciation.  But if the replacement property has less value in section 1245 items, you do have to compute the difference (which pretty much requires a cost seg study on the acquired property), and then you have 1245(b)(4) recapture on the difference.  

I am curious about how that is actually handled by other tax pros in real life scenarios.  If someone does a 1031 with a property that had a cost seg, do you consider it to be mandatory that they do a cost seg study on the replacement property to be sure the replacement property has at least as much 1245 and 1250 value as the exchanged property?  Or are you ok with looking at the replacement property, and if it's higher value and appears to likely have more value in both 1245 and 1250 property, do you figure there is reasonable basis to assume there isn't any recapture?  (And let the excess basis be depreciated over 27.5 or 39 years, as is typically done on real estate without a cost seg.)

About @Sang Ji's question "can you do the cost segregation for the new apartment complex you buy through 1031 exchange".  Yes, but you can only use bonus depreciation on the portion of the value of the property that isn't attributed to the value that came from the exchanged property.  So, don't expect to be able to do a cost seg study on the property and take a big bonus depreciation deduction, unless the new property has significantly higher value than the exchanged property.  

A single member LLC is disregarded for tax purposes, so the LLC doesn't make any difference.

It sounds like you might already be aware of this, but the only time you can put a rental property on a Schedule C is if you provide those "hotel-like hospitality services" that you mentioned, which means things like not just cleaning between guests, but daily cleanings during guest stays, and/or providing them with things like meals or entertainment during their stay. You also mentioned that it's an STR with an average stay of less than 7 days, but that's not a factor on whether it goes on Schedule C.

But just so you're aware, providing hotel-like services so you can put it on Schedule C isn't the only way your rental losses can offset your other Schedule C businesses and your husband's W-2. You can also do that by just having an STR with an average stay of 7 days or less and material participation, without needing to provide hotel-like services. If you do that, it goes on Schedule E like a regular rental, but the difference is that the tax loss isn't limited by the passive activity rules on form 8582. Most professional tax software programs have an option to specify that rental income is non-passive, and that will cause the Schedule E tax loss for that activity to bypass form 8582. There is also a way to do that with TurboTax desktop (but not the online version). In that one, you can go into the forms mode on the Schedule E worksheet, then check the boxes "G - Other passive exceptions" and "D - Material Participation".

By the way, if the average stay for the year is 30 days or less, you have to depreciate the property over 39 years instead of 27.5.  It can change from year to year depending on the average stay length for the year.  

It may be a good idea to at least have a tax profession review your tax return to see if there may be any significant mistakes, or opportunities that you may be not aware of.

David Orr
Tax Modern

Moving a property into or out of an LLC you own isn't a taxable event (as long as it's not an S corp). And having the loan under your name wouldn't matter either.

In the subject you mentioned "1031".  What was the 1031 aspect of this?  Did you do a 1031 when you sold the old property and bought the new one?  You would have had to do that through a 1031 intermediary by the way.  You can't call it a 1031 after it's done if you didn't actually make the transactions with a 1031 intermediary.  It's a very common mistake where an investor sold and bought properties and then when it's tax time they find out they didn't do the right process to actually qualify as a 1031 exchange.  

David Orr
Tax Modern

I've used Stessa with my own rental properties and I recommend it to my clients, and I think it's one of the best ways for rental property owners to track their income/expenses, collect rent, etc.  I've used Stessa and Baselane, and I think those are both great options.  

Having said that, I don't know if you necessarily need a tax account to be familiar with Stessa in order to work with you.  The reports you can create with Stessa, such as an Income Statement, Balance Sheet, etc, are similar to the kinds of reports accountants are used to working with since other finance/rental software also generate very similar types of reports.  

But I think it's great that you're using Stessa. 

David Orr
Tax Modern

There are a few things that are different about a 1065 return that makes accounting software like QB (or Xero or Wave) useful in that case.  One of the big ones is that accounting software can keep track of partners' contributions and partner equity.  As far as I know, I don't think software like Stessa or Baselane can really track anything related to multiple owners/partners.  And those also only have a limited ability at best to generate a balance sheet, which you generally want to include on a 1065 return.

If you have an accountant who just really wants to use QuickBooks to for your accounting, you'll really probably just need to use QuickBooks.  I don't know of a way to avoid that if that's the data format they want to use.  There are some tools to import/export from some other kinds of software like Xero, but I think at best it would end up having some issues if it works at all. 

David Orr
Tax Modern

Doing a cash-out refinance of a rental property doesn't make the interest on that loan deductible as an expense for the rental, which I think is what you were hoping to do.  There are "interest tracing rules", that can roughly be summarized as the interest on a loan is deductible as a business expense only if you use the funds for that business.  It doesn't really matter that a rental property is securing the loan, what matters is how you use the funds. If you used the funds to renovate the rental property, then the interest would be a deductible expense for the rental property. 

Ben's reply has good info on the deductibility of having a mortgage on your primary residence, and how it's only really beneficial if the interest and along with your other itemized deductions is more than your standard deduction.  But tax purposes, just getting a mortgage on your primary is probably still going to be the best option.  It will almost certainly also be at a lower interest rate than doing a cash-out refi of a rental property. 

David Orr
Tax Modern

I'm not sure if we can like to articles on our own websites here, so to be safe I'll just suggest the IRS web page, which does do a pretty good job of explaining the basics: https://www.irs.gov/taxtopics/tc510

The main thing to know if you're going to claim business miles is that you do need to keep a log of every business trip.  There are phone apps that help with that.  MileIQ is a popular one, and that one runs in the background on your phone and logs every trip you make, and then you categorize each trip as personal or business.  Everlance is one that I prefer, but that one you have to remember to open up the app and turn it on before each business trip.  If you haven't been logging your past trips, you can piece together the info from your calendar, etc. 

And @Kory Reynolds brought up a good point about recapture of the section 179 deduction if your business use drops under 50% in a future year. 

David Orr
Tax Modern

Expenses for your rental activities still have to all be on Schedule E, not C. An LLC doesn't make a difference in your federal taxes or what you can deduct.

What you want to do is technically possible, but there are several hurdles.  To deduct the vehicle using section 179, it would need to be a qualified SUV/pickup/van over 6000 pounds.  The more challenging stipulation is you would need to use it more than 50% of the time for business use (and you need to log the miles to document that).  

Ok, if it's still sounding do-able, the next issue is that section 179 can't be used to create a business loss, so it would only reduce your taxes for the year if your rentals are operating as a taxable gain (but rentals are often at a tax loss thanks to depreciation).  

And then the last hurdle is that driving miles between your home and your rental properties by default is considered to be like your "commute" to work, and your commute doesn't count as business miles.  You can get around that issue if you have a dedicated home office space that is used for the operation of your rental business.  This applies regardless of the type of deduction you choose to take for the vehicle.

If section 179 doesn't work in your situation, there is bonus depreciation, which allows for a deduction of up to about $20k of the value of the vehicle for 2024.  That still has the 50% use requirement, but can be used to create a tax loss.  But then we have to get into talking about the passive loss rules, which may prevent you from actually being able to claim a tax loss if the deduction is more than your rental or other passive income.

Or you can claim the actual expenses (gas, insurance, etc) for the vehicle and regular depreciation, proportioned by the percent of business use of the vehicle.  And then finally, there is always the option to just claim the regular standard mileage deduction rate of $0.67/mile.  That's the easiest option.  

But keep in mind all these options still require logging your driving trips, and having a home office if you're claiming trips from home to the rentals. And the passive loss rules may prevent you from getting a tax benefit if your rental deductions are more than your rental income for all of these options.

David Orr
Tax Modern