All Forum Posts by: David Orr

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

If your business is fairly simple, I would say any of us who specialize in real estate also can handle a typical Schedule C sole proprietorship or small business, since most of our clients do have other income, often including small businesses.  If the business includes inventory, employees, partners, etc., that may be out of the scope for some real estate specialists.  You could contact me and/or some of the other accountants who you see posting in this group for an initial consultation or to ask about some of the specifics to see if it would be a good fit for you.

A note about the Certified Tax Coach program mentioned in the other comment.  I think that's a small privately-owned group that tax preparers can pay to join (if they meet certain requirements).  I don't think it's related to real estate tax specifically, as far as I can tell. 

Yeah, that's a good question since REP status only makes sense if your primary job is a qualified real estate profession, and you can't qualify as just a W-2 employee (unless you own 5% or more of the company).  So, when does it really offset W-2 income?  A common scenario we see a lot is when there is a married couple filing jointly and one spouse has W-2 income and the other is a real estate professional (such as a real estate agent, or if the spouse manages their own rental portfolio).  It's perfect for that situation.

Aside from that, REP status can also offset your business or self-employment income.  So someone who is a real estate agent for commission is again a good example of that situation.

It is possible to do your own taxes correctly with TurboTax, but there are some things to watch out for.  A big one is make sure you carried forward any unallowed passive losses from your previous year's form 8582, and other carry forward amounts from your previous tax return.  If you have rental properties, there's a very good chance you had built up some unallowed passive losses, and if you don't find that info from your previous return and enter it in the software, it just goes away.  Just this week I filed an amended return for a client that used a CPA/EA who did their taxes and completely neglected to enter their passive loss carry forward (even tax pros often make that mistake).  And that means missing out on what can often be a huge tax savings in future tax years.  

The other thing people tend to often get wrong when they do their own taxes is depreciation.  It's not really optional, you essentially have to claim it, and this is another item where you have to be sure to correctly enter the past depreciation amounts from the previous tax return.  

Other than that, mistakes related to expenses are common, and not electing things like the De Minimis Safe Harbor election, which can save you if you get audited.

An option you might want to consider if you do your own taxes is at least have a tax professional review your return after you complete it (but ideally before you file it).  Not all tax professionals offer that as an option, but some of us do, and it can be a fairly inexpensive service.