All Forum Posts by: David Orr

Yes, you have to count them in the average if you have a medium or long term tenant.  When you include the medium term tenant, that doesn't push your average over 7 nights?

Hey @Sammy Habbaz.  Yeah, this may be an area where there isn't just one right answer.  It would be interesting to talk about it some more and get into some of the nuances of it.  I messaged Michael Plaks, and I'll send you a message also. 

Hi Sammy. Thanks for reply. A couple quick notes on the things you mentioned. 

1. True.  I didn't go into much detail about the specifics, but I just described the PIS date as "made available to rent".  But yes, it has to be ready and available to rent, and advertised in some way.

2. This is actually an interesting topic that I've actually went down quite a rabbit hole of researching recently, and it gets complicated.  Some of the most prominent names in tax accounting seem to have diverging opinions on the issues surrounding this.  Maintenance and repairs are treated differently than improvements under the Repair Regs, but there may be some confusion about how repairs and maintenance should be treated before a property is in service.  But aside from that, what seems to be even less settled is whether the de minimis safe harbor be used to qualify small improvements (under the $2500 limit) during the startup phase to help qualify what expenses can be included in section 195 startup expenses (and then either deducted as part of the $5000 startup allowance, and the rest amortized over 15 years).  It could be interesting to dive into a discussion about this in another thread.

3. Similar to the above, deductibility of interest and real estate taxes before the property is placed in service is a topic of some uncertainty.  I think the safe and conservative choice is to not.  But I have seen arguments that say it could be allowable and I think it could also be interesting to dive into that in another thread. 

Those past expenses become deductible once the rental is placed in service (made available to rent).  That date is very significant.  Expenses that you would normally need to depreciate, including capital improvements, are depreciated starting on that placed in service date.  If they're in depreciation categories that qualify for bonus depreciation, then you can use that to take a portion of the depreciation that year also.  

Other expenses that would normally be regular expenses, including repairs and small items you're buying for it can qualify for up to $5000 in startup expenses that you can also deduct that first year.  If those types of expenses add up to more than $5000, then they have to be amortized over 180 months (that's 15 years).  

You don't have to do a cost segregation study in 2023, because that too just depends on that same date yet again.  If it's made available to rent in 2023, then it will qualify for the 80% bonus depreciation, even if you do the cost seg in a later year.  (Or 60% if you start renting it in 2024.)  So that date that you make it available to rent does make a significant difference if you're going to do a cost seg at some point on it.  A side note, it is easier to apply the cost seg to your taxes if you do it before you file that first tax return for the year the rental is placed in service.  If you do it in a later tax year, it's a more complicated/expensive process for your tax accountant to do.

David Orr
Tax Modern - Tax prep/advising for rental real estate owners

Unfortunately no, it wouldn't qualify for the mortgage deduction for your owner occupied home.  The rules for the home mortgage interest deduction require that it's a mortgage loan secured by the home. 

(By the way, if the house was a rental property, a loan used for the down payment likely would qualify as a deductible expense, but the rules are different for that situation.)

Kislay also had useful info for this, I would just add that you can rent to family members as long as it is their primary home, but you would ideally want to make sure that the rent you charge is within 20% of fair market rent.  If you are below 80% of the fair market rent for the house, you start to lose the ability to deduct expenses on the rentals and that can have a significant impact on your taxes.  Also for the house with your son, who is listed on the deed?  I'm not quite clear on the details of your arrangement for that one, but depending on how you have that setup, it's possible that may be a partnership, in which case you would have to file a partnership tax return.

In addition to the useful info from Kislay, I would just add that it's worth mentioning that expenses you have to get a property ready to rent before the "placed in service date" of the house are handled differently than expenses that you have while it's a rental.  

Expenses that have to be depreciated, including purchases over $2500, significant improvements, and the building itself... regardless of when you paid for these kinds of items, they can be depreciated starting on the placed in service date.  And if you place it in service in 2023, most of those items can qualify for 80% bonus depreciation (it goes down to 60% next year).  

The tax year you place it in service, you can also deduct up to $5000 of "startup expenses" for other types of smaller expenses from the time before it was placed in service. This doesn't include items that have to be depreciated. But if you make the "de minimis election" on your tax return, it can include expenses that are under $2500 per item for things like furniture, appliances, small repairs, linens, supplies, etc. Startup expenses over $5000 have to be amortized (kind of the same thing as depreciation) over 15 years. 

Finding a local bank would probably be challenging.  There seems to be very few banks who have someone on staff who actually understands what this type of truly self-directed 401k account is.  If anything, when you ask about it you're best off not mentioning "401k" at all and just ask if you can open an account in the name of a trust, since that's what it is.  

Usually the company that provided your solo 401k documents can offer advice on setting on the bank account.  I set up mine with Solera National Bank.  I had also used Wells Fargo previously, but you have to contact someone who specifically knows what you're talking about or else you'll end up with a 401k account, which is not what you want. 

David Orr
Tax Modern - Tax prep/advising for rental real estate owners

Yes, it includes the capital gains.  So if your income plus the capital gains is getting into the higher (15%) range, then you'll be taxed on that portion of the gains at that higher cap gains percent.

David Orr
Tax Modern - Tax prep/advising for rental real estate owners

If you're trying to use the "short-term loophole" to make the losses offset your non-passive (W-2/business) income, you have to have some guest stays to establish that the average guest stay is 7 days or less.  A basis for this is tax court case Rogerson v. Commissioner (T.C. Memo 2022-49) in which the court’s findings state that “without any customer use, it is impossible to establish (as required by the regulations) the average period of customer use.”  For our clients, I recommend at least 2-3 stays minimum to meet that requirement.

David Orr
Tax Modern - Tax prep/advising for rental real estate owners