All Forum Posts by: Account Closed

Hey Slawek, 

Since you manage your own rentals and are a licensed real estate agent, you may qualify as a real estate professional if you spend more than 750 hours on real estate activities and materially participate. If you haven't made a grouping election yet, it’s worth considering. Grouping allows you to treat all your real estate activities as one, making it easier to meet the participation requirements for the syndication loss you received, even if you’re a limited partner.

However, using that loss to offset the capital gain from the sale of your investment property depends on passive activity rules. Even with real estate professional status, passive losses generally can’t be used to offset capital gains unless specific criteria are met. As for the "Lazy 1031 exchange" reference, a true 1031 exchange allows you to defer capital gains taxes by reinvesting proceeds from the sale into another similar property, but that doesn’t seem to apply here since you're looking at using a passive loss instead of a like-kind exchange. You would need to invest in another syndication for that to work. 

Quote from @Noah Wright:

Hi Bryce! It's great to see you're making strides in your real estate journey, and attending the BiggerPockets Conference sounds like an incredible opportunity to network and learn.

With your diverse portfolio, including a fix-and-flip in Cleveland and multiple duplexes in Rochester, you're clearly on a path to scale your investments. Expanding into mid-term rentals and apartment complexes is a smart move, especially in the current market where flexibility in rental strategies can lead to better cash flow.

Networking and Partnerships

• Local Contacts: Connecting with reliable handypeople, lenders, and agents in Cleveland, Rochester, and Austin is crucial for scaling effectively. Building a solid team will enable you to manage multiple projects and properties seamlessly.
  
• Collaboration Opportunities: Since you're open to partnerships, consider exploring co-investment opportunities with fellow investors who share your vision. This could accelerate your growth and diversify your portfolio.

Legal and Tax Strategies

• Engage a CPA: Finding a CPA with experience in real estate holdings and LLCs will help you navigate the complexities of tax strategies and legal protections. This support will be invaluable as you expand your portfolio, ensuring you're optimizing your tax position and protecting your assets. @Account Closed could be a fantastic contact for you.
  
  
• LLC Structure: Ensure your properties are held in an LLC to shield your personal assets. A CPA can guide you on the best structure for your investments to maximize benefits.

Future Plans

• Utilizing Your Lot in Destin: With the lot in Destin, consider the rental potential in a popular vacation destination. Whether you build a rental property or explore other developments, there’s a good chance of a lucrative return.
  
• Goal Setting: Acquiring 25-30 properties is an ambitious and exciting goal! As you scale, continue to reassess your strategies, keeping an eye on market trends and adjusting your approach as needed.

If you’re looking for insights or potential partnerships, feel free to reach out. Networking with others who have similar goals can be incredibly rewarding, and I’m sure you’ll find valuable connections at the conference. Best of luck with your projects, and enjoy the event!

 Thanks for the shoutout Noah! 

Hey Felicia, 

At a high level you’re correct that when you and your husband’s income exceeds certain thresholds (over $150,000), passive losses from rental properties, including depreciation, can’t offset your W-2 income unless you or your spouse qualify as a Real Estate Professional (REPS). However, even if you can’t use the depreciation to offset your W-2 income, you can still use it to offset rental income. Depreciation helps reduce the taxable rental profit, potentially bringing it to zero or even creating a loss, which can carry forward to offset future rental income or other capital gains.

For high wage earners, other tax strategies could include leveraging cost segregation studies to accelerate depreciation on rental properties through bonus depreciation, taking advantage of tax-deferred exchanges (like a 1031 exchange), or maximizing deductions related to property expenses (mortgage interest, property taxes, insurance, repairs, etc.). If you do eventually qualify for REPS, you can use real estate losses (including depreciation) to offset your W-2 income, which can lead to significant tax savings.

Quote from @Alfredo Cardenas:

Hello, Anyone has experience using REPS status via their wife or husband to offset W-2?  

MY 2024 W-2 will be more than $300K and this year (2024) I married a real state agent. I have been reading a lot and educating myself on the REPS scenario for me to use the real state losses in 2024 to offset my 2024 W-2 income. I believe my wife and I pass all the tests under REPS and material participation (adding our time spend of our rental together). I understand that I can not use any prior rental looses losses to offset W-2 in 2024 ( i am using those prior year losses to offset capital gains of 3 homes i sold in this year/2024). BUT, I believe I can do a cost seg and bonus depreciation on the 3 remaining (the ones that I did not sell this year) rentals in 2024 to use those losses to offset my 2024 W-2 via REPS. Is this correct?

Questions:

1- Does the above strategy sound correct or am i am missing something? If this is right, I can save a very significant amount on taxes. 

2- what is the  estimate percentage of people with high W-2s that get audited my claiming REPS via their wife REPS status to offset W-2? Is it almost everyone? 

3- Does anyone have an example of a time log for the material participation test? 

 Hello Alfredo, 

Your strategy sounds correct as long as your wife qualifies for Real Estate Professional Status (REPS) and both of you meet the material participation tests. Since REPS is determined on a joint return basis, her active involvement and the combined hours can qualify you to offset your 2024 W-2 income with real estate losses, including losses from cost segregation and bonus depreciation on your remaining rentals. You’re correct that prior year losses generally can't offset W-2 income, but any new depreciation from cost segregation studies on properties in 2024 should be eligible. As for audits, the IRS may scrutinize high-income taxpayers claiming REPS, so detailed time logs and supporting documentation for material participation are crucial. Many people use spreadsheets to log hours for material participation. We give a template out to clients you are welcome to have just DM me. Best of luck! 

Hey Patty, 

Since the siding and gutters were installed and "placed into service" in 2023, the capital improvement should generally be claimed in your 2023 taxes. The key factor for depreciation is when the asset is placed into service, not necessarily when it was paid for. So, even though you paid for the work in 2024, you can begin depreciating the improvement in 2023. However, the exact treatment may depend on your accounting method (cash vs. accrual basis), but most individual taxpayers use the cash method, meaning they typically report expenses when paid. Since this is a capital improvement, it doesn't follow the same rules as a standard expense, so you'd likely start depreciation in 2023. You may want to confirm this approach with a tax professional for added clarity.

Quote from @Liz Zack:

Our amazing cpa is retiring and we’re in need of a new team. Looking for someone who can help with accounting for our (unrelated to real estate business) and also help us with our investments including a 1031. Who do you work with that great! (We’re based in NJ) 

Hey Liz, on the BiggerPockets forum, it's against the rules for us as accountants to promote ourselves. I'd strongly recommend you look at the other accountants posting and providing value, see which ones you like, and which ones are accepting new clients at this time. Best of luck!

Hey Marcus, 

This is a bit complicated for a bigger pockets forum, but ill give it a go. 

Your understanding of the capital gains calculation appears mostly correct, but a few details could affect the final outcome. First, the basis calculation for Person C seems accurate, with the step-ups in basis following the deaths of Persons A and B. As you noted, the sale price minus the stepped-up basis yields a capital gain of $123,333. However, the use of the property as a personal residence by Person A might qualify Person C for a partial exclusion of capital gains if Person A met the 2-out-of-5-year ownership and use test before their death. This would depend on the specifics of IRS Section 121. Additionally, the limited rental period may not significantly impact the gain, but it’s essential to confirm whether any prorated exclusion applies or if the IRS rules regarding converting a primary residence into a rental property could affect the tax owed.

Quote from @William C.:

We own a SFH long-term rental property in Nevada that was placed into service in 2023. We have run a cost seg study on the property and qualify for 80% bonus depreciation. In 2023 we also had a major repair take place. There was a water leak in a bathroom which required a full renovation of that bathroom. Cost around $11,000 total. What would you recommend as the best strategy for accounting for this situation as we file taxes for the 2023 tax year. Thanks in advance. Can provide more info as needed.

Hey Nathaniel, 

Given your scenario, where you've already conducted a cost segregation study and qualify for 80% bonus depreciation, the best strategy depends on how the $11,000 bathroom renovation is classified. If the renovation is considered a repair—addressing the water leak without substantially improving or upgrading the bathroom—you could potentially deduct it in full for 2023, reducing your taxable income immediately. However, if the renovation is deemed an improvement (since it involved a full renovation), it likely needs to be capitalized. Given that it sounds like this renovation may have upgraded the property, capitalizing it is probably the more appropriate route. But, it’s worth consulting with a tax professional to assess whether any parts of the expense could still qualify for immediate expensing under safe harbor rules or another method to maximize deductions.

Hey Marcus, 

It's common for Qualified Intermediary (QI) agreements to have provisions that protect the QI, but some of the terms you've outlined do raise concerns. The interpleader term may force your LLC to submit to unfamiliar jurisdiction, potentially waiving protections, which could be problematic. The exculpation and limitation of damages clause seems overly broad, particularly with the QI limiting liability even in cases of negligence or misconduct, like wire transfer errors. The indemnification clause is also quite narrow, offering little protection for you if the QI makes a serious mistake. Lastly, the "right to rely on instructions" clause suggests the QI has minimal responsibility to verify the authenticity of communications, which could increase risk. These terms aren't unusual but may warrant negotiation or seeking alternative QIs who offer more balanced protections.

Quote from @Calum Bressington:

Wondering if anyone has converted their multimember LLC down to a sole member LLC and what the process is, all I have found on it is to fill out form 8832. Also, I won't do any buisness this year through my LLC so will I still have to file? Thanks for everything!

-Calum

 Hey Calum, 

Yes, you can convert a multimember LLC to a single-member LLC, but it involves more than just filing Form 8832. First, you'll need to update your operating agreement and notify your state about the change in membership. If your LLC conducted any business this year, you'll likely need to file a final partnership return (Form 1065) to report income and expenses up to the point of conversion. After that, as a single-member LLC, you would report any future income on your personal tax return using Schedule C. Additionally, it's recommended to obtain a new EIN for the single-member LLC.