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Tax, SDIRAs & Cost Segregation

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Bill Bouillon
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Tax Deductions for Non-Professional

Bill Bouillon
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Posted Feb 9 2024, 15:47

Hello BiggerPockets!

I've been consuming as much content from BiggerPockets the past 6+ months to plan for an earlier retirement than I initially thought possible. I plan to ease my way into REI by renting out my current house (with those COVID-interest rates!) when I move into a new home hopefully within the next year or so. I'm curious what experiences people have had taking tax deductions as a non-professional REI. I plan on creating an LLC to put the property into. It's unclear to me how that would affect my W-2 income tax liability though. I recognize the simple answer is talk to a REI friendly CPA (which I plan to do), but I'm curious what others have deducted to less their own tax bill if they just acquire a couple LTRs over time.

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Replied Feb 21 2024, 19:54

Hi Bill. You're right, a CPA would be able to answer your specific tax questions, but I do know that as a single member LLC, the default tax status is disregarded entity. This means that your net profit from your LLC business gets reported on your personal tax return on a Schedule C. There are plenty of tax deductions you will be able to take in your business such as utilities, repairs and maintenance, any advertising for the property, etc. You'll want to be sure to keep good records of your income and expenses to find that net profit at the end of the year. And I would suggest using an accounting software to make things easier. I use Quickbooks Online and haven't had any issues!

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Tom Morrissey
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Tom Morrissey
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Replied Feb 22 2024, 03:54

@Bill Bouillon  @Katie Funk I agree with Katie, talk to a (good RE lawyer or RE CPA), even if you grab just an hour of their time. But, if you are not a professional REI, one adjustment I would make to what Katie wrote is that you would report the income (and deductions) on Schedule E (for rental real estate) since it is passive income, and you wouldn't use Schedule C. The good news is that you won't need to pay social security + medicare taxes ;) but you also do not get to deduct it from any earned (W2) income. And hopefully with the proper depreciation, you'll pay no income taxes on the money you do receive from the rent.

@Michael Plaks has some great write-ups on all of this.

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Zachary Jensen
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Zachary Jensen
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Replied Feb 22 2024, 06:53

Hey @Bill Bouillon

the two "main paths" we see investors taking for the maximum tax benefits (in general) are "real estate professional status" and "short term rental loophole". Throw those phrases into google and after a few articles you will get the gist, enough to meet with a real estate-focused accountant on them at least. We help our clients with these strategies on a daily basis and they usually wipe out significant w2 tax liability. 

*This post is not tax advice, your facts and circumstances will differ* 

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Patrick Roberts#2 Private Lending & Conventional Mortgage Advice Contributor
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Replied Feb 22 2024, 07:55

I recommend attending the next Red Stick REIA meetup in BR if don't already do so. John Roberts Jr is one of the organizers, is a CPA, and knows the ins and outs of tax advantages for REI.

Food for thought - you'll also want to consider your tax strategy and reported income through the lens of your future plans. If you're planning to get another traditional mortgage for a new property in the near future, you'll want to consider the impacts your tax return/reported income will have on qualifying. 

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Lane Kawaoka
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Lane Kawaoka
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Replied Feb 22 2024, 10:08

You can easily get PAL or passive losses days by investing in LTR or some people will go into equipment deals to take advantage of section 179 deductions as sort of a synthetic way of getting PALs. You don't need REPS for this.

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Bill Bouillon
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Bill Bouillon
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Replied Feb 22 2024, 19:02

Those are all great suggestions! I think the "short term loophole" is probably a great way for tax benefits for my situation, just not sure if I'd be ready to commit to something more active like that. I keep seeing the Red Stick REIA group pop on here for all my Baton Rouge folks, definitely need to check that out.

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Basit Siddiqi
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Basit Siddiqi
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Replied Mar 1 2024, 17:45

If you have long-term rentals, but default, you can take up-to $25,000 of rental losses if your income is below $100,000. The $25,000 deduction phases out as you earn up to $150,000.

If your income is above $150,000, your rental losses are suspended and carried forward.
The above wouldn't apply if you can claim real estate professional status.