All Forum Posts by: Jake Hottenrott

@Michael Ndjondo makadi - Good evening to you as well and congrats on deciding to purchase your first investment property!  

So bad news, because you are not currently in business (investing, renting, etc.) you will not be able to deduct them as a business expense under section 162.

The good news, because you have decided to go into business you will be able to elect to deduct up to $5,000 of these start up costs under section 195.  Anything you spend above and beyond that, will need to be amortized over a 180 month period.  

Here's a handy timeline chart that I used yesterday in a post to show where an expense should be allocated depending on where you are in the process.

There are a few other caveats regarding business trip deductions and start up expenses that you will want to talk to your tax professional about as well. 

I hope that helps!

@Jim M. - You have clearly asked a question that has inspired a bit of debate, which is good.  Debate works as a way to break apart these complicated tax matters and get to the heart of each issue individually.  As far as your crowdfunding site question, my inclination is that the IRS would consider this the same as buying a stock or mutual fund as an investment and not being an active trader or real estate investor that would qualify you as being "in business".  

@Nicole Bernshaw - Brandon's email response and @Natalie Kolodij are right on this one without much question.  Education that qualifies you for a new trade or business is non-deductible.  I couldn't deduct my college expense (as a business expense), CPA exam fees or my CPA prep classes as it prepared me for a new career  (pub 970).  Now that I am a practicing CPA, any classes that I take to sharpen those skills are deductible.  Unfortunately that other CPA is wrong.  Unless you were in the real estate world and performing a skill that would be sharpened, there is no way to correctly deduct it under the tax code as written.  So don't bother reading the tax code trying to find that loophole, it won't say anything different.

@Ashish Acharya - That's a doozy of a statement to say that that taxpayer could have used section 195 to capitalize those education expenses as start up costs, even acknowledging it's a risky position.  The IRS has levied penalties on tax preparers who have intentionally and recklessly disregarded the rules in determining a business client's deductions.  The tax case doesn't specifically  address whether the taxpayer could use section 195 on those because it stated that they weren't deductible at all as a business expense as it was determined the classes qualified him for a new trade or business.  

Here's a fancy graph of the timeline of deductibilty and where it falls for those of us who enjoy pictures vs a bunch of dry back and forth between CPAs.

J of A - How to Scale the Wall of Deductibility

@Joe Wood - You can deduct expenses in any business form, even a sole prop without an entity, as long as its ordinary and necessary.  

No different "limits"

@Joe Wood - Pretty simple answers for you.

- Filing taxes - Easy as single member as it is included on your personal return.  Multimember requires a 1065 partnership return.

- same expenses

- same income

the reason to have a multi member LLC is if you have multiple partners. If you and your wife both want to lay claim to the property in XX% and XX%, then you need a multi member. If you are the sole partner owning 100%, you are good with a single member.

This was over generalized but it cuts right to the heart of your questions. 

@Natalie Kolodij thanks for thinking of me,

@Bryce Brown If you would like to have a conversation to see if we would be a good fit to work with each other.  Feel free to PM me.  I'm always up for an honest conversation.  

Thank you in advance for any referrals.

Situation - Recently purchased a deal through my LLC with cash expecting to use the BRRRR strategy (not my first rodeo using this). While I have lending lined up with a 5 year balloon, 20 year amortization and I'm ok with that, does anyone know of any lenders specific to Illinois that have longer term fixed rates for a cash out refinance assuming the proper appraisal and LTV?

I did a mold deal and it wasn't that bad.  Was there sticker shock of down time, remediation cost and rebuild?  Yep.  Overall I offered a price that worked for me to make money in almost every scenario.  The property ended up being almost a 2% rule deal (1.78%).  Is this a fix and flip or a rental?

The key here is to have multiple bids for remediation and reconstruction.  Also, make sure you know the cause and how to fix it as well, otherwise you are in the same boat.  Water issues cause a lot of people to run, but if you know how to fix them you can make a lot of money off them.  

@Christina Wrightsman - I think your response is really well written but I might leave off the no showing portion.  While I don't share the same excitement of showing properties to unqualified candidates as @Mike Cumbie, I would schedule someone who stated they don't meet the income requirements.  I would do this by scheduling them at the same time or close enough to cross paths with a potential tenant that they it might apply some psychological pressure that there is a lot of interest and at the very least as Mike stated, it does allow another person to see it and talk about the property.

Thumbs up on that one!   As a CPA I'm happy to walk through the tax implications of entity structure but I don't practice law, so I stay away from the creation of a legal entity!

@Jayme Jahns - So in paying the downpayment from your HELOC (I'm assuming the whole downpayment) you are effectively leveraging the entire purchase?