All Forum Posts by: Bryan Martin

Quote from @Dennis Kim:

Hi there I am looking to invest in my first property and thinking of a duplex or triplex, one of my advisors said to learn how the taxes would work if 

1. I happen to live in one of the units (house hack)

What can I write off as a "investment property"? or can I write it off as as a investment property if I live in one of the units? or do I need to rent out all the units in order to do that?

Also can I write off the purchasing the property as a tax write off if I live in one of the units or do I need to rent all the units out?

Also if there is any advice you can share related to tax write offs for purchasing a multi family I would be very grateful for that as well. Thanks!

If you house hack:

• Your unit = personal (no rental write-offs).
• Tenant units = rental. You can deduct their share of mortgage interest, taxes, insurance, repairs, utilities, and depreciate the rental portion.
• Shared costs (roof, lawn, etc.) get split.
• You can’t deduct the purchase price, only depreciate the rental share of the building.
• Sell later: rental side faces depreciation recapture; your side may qualify for the $250k/$500k home sale exclusion.

Keep records clean—treat rental and personal separately 

Quote from @Ruth Schrader-Grace:

If I sell my primary I know there will be capital gains after 30 yrs of ownership. We will be able to get the $500k exclusion. Is there a way to reduce that huge capital gain hit? And no we have no plans to rent it for a year or to turn it into a rental at all, as we need the money from the sale to pay cash for the next primary.

You’re already using the biggest break available: the 121 exclusion ($500k for married, $250k single), so that's good.  That knocks out a lot of gain right off the top. Here area few other options:

• Basis adjustments: Add in every improvement you made over the 30 years—kitchen remodels, roof, windows, decks, etc. Not maintenance, but upgrades (I tell my clients to just try to get the major stuff because you'll drive yourself crazy trying to find receipts or numbers for every little thing). This raises your cost basis and lowers taxable gain.
• Selling costs: Realtor commissions, title fees, legal fees, etc. reduce the gain.
• Loss harvesting: If you have taxable investments, you can realize losses in the same year to offset the home gain. That’s the only real “offset” you can pair with the sale.

Other than that, it's just trying to use other strategies to lower your overall tax bill.

Quote from @William Thompson:

•⁠ ⁠100% bonus depreciation is back—permanently

•⁠ ⁠Estate exemption raised to $15M / $30M (huge for legacy planning)

•⁠ ⁠SALT cap bumped to $40K (trust planning just got interesting)

Big question: Are you doubling down on cost seg + bonus depreciation now, or reworking your structure to leverage trusts and deductions?

Curious how others are adjusting their strategies in light of the new rules

We work with a lot of real estate clients, and the reaction has been mixed. Everyone’s intrigued by 100% bonus coming back, but I’m not seeing the same feeding frenzy we had when bonus was 100% and mortgages were in the 3% range. Cheap debt plus big deductions had people stacking properties like crazy. Now, even with full bonus, high rates are forcing investors to be more selective.

Some are still doing cost seg on assets they already own, while others are holding off on new purchases until financing makes more sense.  At the end of the day, we advise clients that the tax part is only one part of the investment and they have to make sure the whole investment picture makes sense for them.

Quote from @Clare Cui:

I've asked a few people and I'm getting mixed answers. 

I have an incredible handyman that has done such good work for my properties in San Diego. He's reliable, trustworthy, and pays great attention to detail. 

Do you tip your handyman? He goes above and beyond, plus the holidays are coming up. Thanks in advance! 

It all depends.  If they’re doing it for dirt cheap and gave great service, I’m a lot more likely to give them a “bonus” than if they charged me full rate and took a long time to get to the worksite.

I don’t think there’s a hard and fast rule on anything, but if you want them to treat you well, you need to treat them well (pay when asked, provide meals for him/her and their crew, be flexible when you can, pay extra, etc.).  

Quote from @Tyler Bilinovic:

I have just acquired my first two long term rental properties this year and am looking to take advantage of the tax benefits. How important is it to get with CPA to assist with tax benefits. I have spoke with my parents who have been in long term rental business for 30+ years and use an account to for their taxes. They do not believe it is necessary to spend thousands of dollars on an account with the two properties I own. Any thoughts or suggestions?

Congratulations on acquiring your first rental properties! It’s crucial to start off on the right foot with your taxes. Working with an accountant is important to ensure you’re maximizing your tax benefits and staying compliant with tax laws. Even with just two properties, a professional can help you navigate deductions, depreciation, and other tax strategies specific to real estate investing. You shouldn’t have to spend thousands on accounting services, but investing in a qualified accountant now can save you money and headaches down the road.

Quote from @Patrick Shep:

if you’re figuring out the land value for depreciation purposes, can I use the Fair market value for the land? The county assessment taxes it at 59k which is WAY too high. A plot of land has sold for $8500, $10k and 29k within that area.  Can these be averaged together or even use the 29k? I don’t want any flags but don’t want to leave anything on the table For depreciation.

Yes, you can use the fair market value (FMV) for the land when determining depreciation. If the county's assessed value ($59,000) seems too high, it's acceptable to base the land value on recent comparable sales in your area, like the ones for $8,500, $10,000, and $29,000. You can average these or choose the most comparable sale to determine a reasonable land value.

Using a lower land value increases the building’s depreciable basis, maximizing your depreciation deductions. Just make sure to document how you arrived at the land value in case of IRS inquiries.

If you’re unsure or want to avoid any red flags, consider consulting a tax professional to ensure you’re compliant and optimizing your depreciation.

Quote from @Marlie Evans:

Now using the de minimis/routine maintenance safe harbors instead of bonus depreciation for appliances, carpet and the like. I don't understand why my taxes go up a few bucks when I change move an item (a kitchen appliance) from bonus depreciation to an expense on schedule E. It seem counterintuitive. Wondering if it is worth amending my last few years taxes to change all of those purchases of appliaces from depreciation to expenses to avoid future depreciation recapture upon sale. Does each year have to be amended? I saw that depreciation can be corrected on a single form.

Also I do not understand how/where to do a partial asset disposition in turbotax. I replaced two roofs on rental properties. Had not done a cost segregation study when I purchased these two homes, but understand you can calculate a value  to write off so you are not depreciating two roofs...using salvage value or producer price index. Does anyone have a spreadsheet formula for this?

Hi there,

I understand that navigating the tax implications of rental property expenses and depreciation can be complex. I’ll do my best to address your questions:

1. Why Do Taxes Increase When Moving an Item from Bonus Depreciation to an Expense on Schedule E?

• Timing of Deductions: Both bonus depreciation and expensing under the de minimis safe harbor allow you to deduct the full cost of an asset in the year of purchase. However, the way these deductions interact with other tax provisions can differ.

• Impact on Adjusted Gross Income (AGI): Deductions can affect your AGI differently depending on where they’re reported. For example, deductions on Schedule E might impact passive activity loss limitations or eligibility for certain credits.

• Phase-Outs and Limitations: Certain tax benefits phase out at higher income levels. Changing the method of deduction might slightly alter your taxable income, leading to a small increase in taxes.

Bottom Line: The slight increase in taxes could be due to how different deductions interact with your overall tax situation, even if the total deduction amount remains the same.

2. Is It Worth Amending Previous Years’ Taxes to Change Purchases from Depreciation to Expenses to Avoid Future Depreciation Recapture?

• Depreciation Recapture: When you sell a rental property, depreciation you’ve claimed can be “recaptured,” meaning it’s taxed as ordinary income up to a certain limit. By expensing items instead of depreciating them, you might reduce future depreciation recapture.

• Filing Form 3115: Instead of amending each prior year’s tax return, you can file Form 3115 (Application for Change in Accounting Method). This form allows you to change your accounting method and catch up on missed deductions or make adjustments.

• Considerations:

• Complexity: Filing Form 3115 can be complex and might require professional assistance.

• Cost vs. Benefit: Weigh the potential tax savings against the time and cost of making the change.

Recommendation: Consult a tax professional to evaluate whether the potential benefits outweigh the efforts and costs involved.

3. Partial Asset Disposition in TurboTax: Handling Roof Replacements

• Understanding Partial Asset Disposition:

• When you replace a structural component like a roof, you can write off the remaining undepreciated value of the old roof.

• This prevents you from depreciating two roofs simultaneously.

• Calculating the Value of the Old Roof:

• Estimated Cost Method: Estimate the original cost of the old roof based on the total property cost and allocate a reasonable portion to it.

• Producer Price Index (PPI): Use the PPI to adjust the current replacement cost back to the acquisition date to estimate the original cost.

• Salvage Value: Consider any remaining value after accounting for depreciation up to the date of replacement.

• Implementing in TurboTax:

• Adjust the Asset Entry:

• Reduce the basis of the property by the estimated value of the old roof.

• Enter the disposal date and adjust accumulated depreciation accordingly.

• Add the New Roof as a Separate Asset:

• Enter the cost of the new roof and set it up for depreciation over its appropriate recovery period.

• Spreadsheet Formula:

• While there’s no standard spreadsheet, you can create one using the following steps:

1. Determine Original Roof Cost:

2. Calculate Accumulated Depreciation: Based on the original roof cost and the number of years it was in service.

3. Calculate Remaining Basis: Original roof cost minus accumulated depreciation.

Note: TurboTax may have limitations with complex entries like partial dispositions. Professional tax software or assistance might be more suitable.

Final Thoughts:

Given the intricacies of these tax situations, especially with partial asset dispositions and accounting method changes, it would be beneficial to consult with a Certified Public Accountant (CPA) or tax professional who specializes in real estate. They can provide personalized guidance, ensure compliance with IRS regulations, and help maximize your tax benefits.

Hope this helps!

Quote from @John Carr:

Hey Team,

Quick run down. I live in my PR located in IL, but bought a home in FL with my daughter which she is house hacking. We are renting out 3 rooms atm. Since I make well more then my daughter, the plan was for me to claim the house for any tax breaks.

Question is, will we need a more specialized tax professional then the HR Block person I've been using for 20 years. They, the HR Block person, is also an investor and owns multiple properties, so I just assume they are well versed.

Thanks for your thoughts!

Hi there,

Given the complexity of your situation—owning a rental property in Florida while residing in Illinois, house hacking with your daughter, and planning to claim tax breaks—it might be a good idea to consult with a Certified Public Accountant (CPA) or an Enrolled Agent (EA) who specializes in real estate taxation.

While your current tax professional at HR Block has experience with multiple properties, a specialist can offer more in-depth knowledge on multi-state tax issues, rental income reporting, depreciation, and maximizing deductions specific to real estate investments. They can also help navigate any IRS regulations related to co-ownership and rental arrangements with family members.

Investing in specialized tax advice can help ensure you’re fully compliant and making the most of any available tax benefits.

Hope this helps!

Yeah, 1031's can be confusing until you get the hang of them. Unfortunately, your accountant is right about this one.

In a 1031 exchange, the goal is to roll over all the proceeds into the new property to defer the capital gains tax. The "boot" (cash or non-like-kind property you received, which is $190k in this case) is taxable. Your original cost basis of $175k doesn’t offset that boot; it just carries over to the new property. So, you'll be taxed on the full $190k boot as a capital gain.

Running the project through an LLC gives you tax flexibility, such as choosing how the income is taxed (sole proprietorship, S-Corp, etc.), and makes it easier to track and deduct business expenses. However, it adds complexity with more paperwork and potential self-employment taxes on all the income.

Doing it as an individual is simpler, with everything going on your personal tax return, and you might benefit from the home sale exclusion if you end up living in the property for a few years. But, you could face limits on deductions and miss out on some tax planning opportunities if you do that as well.

If this is a one-time deal, doing it as an individual might be easier. But if you plan on doing more spec homes, the LLC would likely offer more benefits through legal protections (obviously speak to your attorney about this) and potentially tax savings if you look to file as a S-Corp.