All Forum Posts by: David Orr

That last reply was to a thread that was from a year ago, but I think the answers are still valid.  There are some very good alternatives to using QB, including Xero and Wave.  But for anyone who just has rental properties that they report on a 1040 tax return (not in a partnership), I would suggest considering rental property management software rather than general accounting software.  

There are rental management tools like Stessa, Baselane, Innago, and many others that include income/expense tracking that handles all the accounting tasks and reporting you really need for rentals.  These tools are much easier to use than QB (even for those of us with QB expertise).  Plus, they handle online rent collection (a necessity if you don't have a property manager!) with auto-pay options, automatic late fees, and reminders, lease signing, security deposit collection, etc.  And they're cheap or nearly free.  

Stessa is a great option, but Baselane is my current personal favorite, partly because it doesn't require that you use a special bank account for rent collection like Stessa does. 

David Orr
Tax Modern

A note about the $25,000 loss allowance, that only applies to real estate tax losses for an activity that you "actively participate" in.  So that generally doesn't apply to a partnership where you're a limited partner and you're just passively investing in the deal.

So then the only way you can have real estate losses on a K-1 as a limited partner that you can deduct from your W-2 income is if you qualify for real estate professional status (REPS), as some of the other comments mentioned.  And you would only qualify for that if your primary job (where you spend the most hours) is in a real estate field, but also it has to be at a business that you own at least 5% of (so W-2 income typically doesn't qualify).  So if your main job is a W-2 job, you probably don't qualify.

But that's still not all because in addition to REPS status, you also have to qualify as having material participation in the K-1 business to make it non-passive income.  But if you make a 1.469-9(g) grouping election, you can group your rental activities (self-storage qualifies) and your real estate partnerships together and then you just have to have enough hours to materially participate in the group, so then your K-1 income can qualify.

It's not uncommon for tax professionals to not know about how to use REPS and the grouping election to make limited partnership K-1 income non-passive.  But they should generally at least know that limited partnership K-1 tax losses can't just offset your W-2 income in most cases, it would be concerning if they don't at least know that. 

David Orr
Tax Modern

Just to be clear, if you have an STR and you materially participate in it, you aren't subject to NIIT. That's true regardless of whether you have REP status. So both REP status and having an STR are ways to make the income nonpassive (with material participation), which also avoids NIIT. I don't know if you necessarily meant to imply otherwise, but just clarifying that.

But it's good you brought that up because it's easy to forget about that.  It really is a nice perk of making rentals nonpassive that high income earners can avoid NIIT, which is easy to forget since we're usually focusing on qualifying rentals as nonpassive to deduct a tax loss. But it can be useful for rentals with gains also. 

David Orr
Tax Modern

Yeah, I'm not entirely sure what appeals case they're referring to.  In footnote 35 they talk more about how it's not really being addressed in this case because of procedural/timing issues with the Commissioner's motion.  But I don't know what the appeals case is that they mentioned, but it sounds like the Commissioner still intended to bring that up as an issue in this case.  It certainly does seem questionable whether they really were operating a trade or business. 

David Orr
Tax Modern

A 1031 exchange is only an option if the properties you're selling and the property you're buying are for business use (generally, that means they have to be rental properties, used for your business, or held strictly for appreciation and not used for personal use).  The IRS safe harbor is at least 24 months of business use for the property you're giving up and the property you're acquiring.  

I wanted to mention that since it's unclear whether some of the properties in both of those situations are for personal or business use. 

David Orr
Tax Modern

I specialize in tax services for real estate investors and I'm located in Austin.  But I don't have a physical office location, I work remotely with clients all over the US.  So I may not be a good fit for what you're looking for if you want a local tax office location to walk in with your paperwork. 

David Orr
Tax Modern

Unfortunately, common spaces that you use as part of your personal space can't be included in the rental portion calculations.  Code section 280A defines personal use of a real estate property, and it doesn't allow deduction of expenses for personal use space because it's considered to be your residence rather than rental property.  In other words, if you have use of the space, it isn't considered rental space (even when it's also shared by a renter).  

Treasury Regulations section 1.280A-2(i)(3) suggests a couple ways you can proportion the rental portion of a property, including using square footage (which is most common).  It does also say that you can use the number of rooms as an alternative way to divide it up, but only if the rooms are approximately the same size.  And note they didn't say bedrooms, they said rooms.  So if you have two bedrooms and a common space, and all 3 of those spaces are about the same size, that's 3 rooms, so the exclusively-for-renter-use room would be 1/3.   Not 1/2.  Unfortunately.  

I know it is logical to think you could deduct half of the shared common space, but unfortunately the tax law wasn't written to allow that.  

David Orr
Tax Modern

I'm replying to my own old post from a year ago because I wanted to update my answer since my opinion on this has evolved over time. 

There is still a lack of specific IRS guidance on this.  But I now advise clients to report rental arbitrage on Schedule E.   The primary reason is that it is still clearly a rental activity, regardless of whether you own the property, and there isn't any specific tax law or IRS guidance that says you have to be the owner of a rental property to be operating a rental activity. 

The key thing to know about doing rental arbitrage is the thing you're missing out on is the ability to deduct appreciation of the property itself since you can't depreciate assets that you don't own. But you can deduct the rent you pay as an expense.

I have opinions on this.   

Excel:  You can use Excel if you don't have many expenses, but it's a lot of manual work to enter transactions by hand that way.  

QuickBooks:  I think for normal people who aren't accountants, QuickBooks is not a good choice in my opinion.  It takes time to learn and configure it for rentals, it's just not nearly as good as a tool that is custom-built for managing rentals and rental finances.  Things get even more complicated when you have multiple rentals and you end up having to use class tracking to try to keep them separate.  It's messy and complicated.  One exception, if the rental is owned in a partnership, you should get a bookkeeper who uses accounting software like QuickBooks (or Wave!).

If you have a rental property, your life is so much easier if you use software designed for that.

Stessa is a great option.  Stessa is very good, but actually Baselane is my new favorite one to use.  Either of those are great options!

These apps make tracking the financing so much easier, plus they handle online rent collection (a necessity if you don't have a property manager!), auto-pay, automatic late fees, and reminders, lease signing, security deposit collection, etc. These rental apps do a great job of producing reports to track your rentals' performance, and output everything you need for tax filing.

David Orr
Tax Modern

The answer to this is yes and no.  You can start deducting depreciation and other expenses from the date the property is "placed in service", which is not the same thing as the date someone first books it.  A property is placed in service when it is available and able to be rented, and you have in some way advertised it for rent.  If both of those things are true, you can and should start depreciating it and deducting expenses related to it from that date.

But then you did say "deduct depreciation against my personal w2 income". By default, the tax loss from the rental can't offset your W-2 income because passive losses can't usually offset non-passive income. But there are a number of exceptions, including if your income is under $150k, real estate professional status, and the STR loophole. The STR loophole is the only one that can't apply in this situation because that one does require stays at your rental property in the year you use it.

So if you don't qualify for one of those, your tax losses would be suspended until they can offset future passive income.

David Orr