bonus depreciation help/questions

[Adam Zuar]

My parents bought a short term rental property in Cape Coral Florida in 2021. From what I understand, they can use bonus depreciation once a cost segregation study is done. Unfortunately they did not get a cost segregation study done, or use bonus depreciation while filing their 2021 taxes.

1. Are my parents still eligible for bonus depreciation? and if so, how does using bonus depreciation in "year 2" (i.e. 2022) differ from using bonus depreciation in "year 1" (i.e. 2021)?

2. I heard that once your modified adjusted income is over 100k or 150k that you might not be eligible for bonus depreciation. Is that accurate? Assuming it is accurate, perhaps the best approach would be to put the house in a LLC before doing their 2022 taxes?

Source for this assumption: https://www.therealestatecpa.c...

Lastly, is there a real estate CPA that someone can recommend in the Cape Coral Area?

Thanks!! 

Adam

[Bonnie Griffin Kaake]

@Adam Zuar There is one big difference between filing in 2021 and filing in 2022 for your parents. When you file in the first year of ownership and tax filing, you don't have to do a Change of Accounting Fort 3115 to switch from straight-line depreciation to accelerated. This is a complex form and makes the cost of doing the study a little more. Most tax professionals hate doing this, but we do them for the CPA/tax professional to review and sign. As for bonus depreciation, it applies if available the year the property was purchased and occupied. 

There is no income limit on getting the bonus depreciation. Although, some states restrict its usage. Check with your own state and your CPA to determine if there are any restrictions. Even in the unlikely case there are restrictions on bonus, it is still worthwhile to do a study and it is recommended by the American Association of CPAs (AICPA) and the Journal of Accountancy. 

Let me know if you have any additional questions. It only takes about 2 days to get a no-cost estimate on the benefits available. There is no difference between personal ownership and an LLC from the perspective of cost segregation studies.

[Michael Plaks]

@Adam Zuar

Yes, they can still do cost segregation and amend (redo) their 2021 tax return after that. You will not need to deal with Form 3115 mentioned in an earlier response, because it's only been one year. And no, you do not "start" it in the second year, you go back to year 1.

Whether or not it helps your parents is a completely different issue that needs to be examined case-by-case. What Brandon's article refers to is the limits on available deductions for passive losses, based on income. It applies to all deductions combined, including cost segregation. Again, it needs to be evaluated one-on-one before we know whether cost seg helps your parents.

One critical distinction is that they bought a short-term, as opposed to a long-term, rental. The rules are different for STRs, and you may be able to sidestep the limitations on passive losses. They may, in fact, not be passive. Maybe your parents can change a few things to meet the special criteria known as "material participation." Maybe they are better off waiting for 2023. None of this is simple, unfortunately, so please get  with a competent real estate accountant before making your moves.

[Julio Gonzalez]

@Adam Zuar I agree with @Michael Plaks. STRs can benefit from engineered cost segregation studies but it can be a case by case basis. Most cost segregation study companies will provide you with a free cost/benefit analysis quote to help you decide whether the benefits are worth the cost. If you're considering a study, I'd definitely recommend getting quotes from a few companies to help you make your decision. As for a CPA in your area, I've worked with a number of great CPAs and would be more than happy to provide you with some recommendations. Feel free to reach out.

[Adam Zuar]

@Michael Plaks - Thanks for sharing; great information! I must admit, I'm very new to real estate, so forgive me if the following question doesn't make sense...

I just finished this video regarding passive activity losses:

My understanding after viewing the video is that you can use up to 25k of passive losses against your W2 income if you're not a real estate professional. That seems great, but I'm curious how creating an LLC and maybe trust fund might help from a tax perspective. If I were to hypothetically create a trust, and have the trust fund fund an LLC to buy real estate, then there would be no "active" income for the trust fund. Is that accurate? Then, the trust fund could use the passive losses at the end of the tax year from the first rental property to buy another property? I know this can get complicated quickly, and I'm probably missing some important steps along the way..

You also mentioned "material participation" - is that similar to being a real estate professional? 

Thanks!

[Michael Plaks]

Quote from @Adam Zuar:

@Michael Plaks - I just finished this video regarding passive activity losses: My understanding after viewing the video is that you can use up to 25k of passive losses against your W2 income if you're not a real estate professional. That seems great, but I'm curious how creating an LLC and maybe trust fund might help from a tax perspective. If I were to hypothetically create a trust, and have the trust fund fund an LLC to buy real estate, then there would be no "active" income for the trust fund. Is that accurate? Then, the trust fund could use the passive losses at the end of the tax year from the first rental property to buy another property? I know this can get complicated quickly, and I'm probably missing some important steps along the way..

You also mentioned "material participation" - is that similar to being a real estate professional? 

This could be a great video, have not watched it. Unfortunately you cannot explain (or learn) a topic this complicated in 15 minutes. Up to $25k of losses is available IF your income is under $100k - something you mentioned in your original post. Then it's phased out to $0 between $100k and $150k.  LLCs or trusts are not going to change this basic principle. Ever heard of the KISS approach? :)

Material participation is one of the requirements for the real estate professional status, but also applies to other situations. Again, it's really complicated. I wish it was not but it is. Not a great project for DIY.