Ask me (a CPA) anything about taxes relating to real estate

503 Replies

Hey, guys!

I've been on BP for about 7 months now and I have quickly learned two things:

  1. There is no better place than BP to talk real estate
  2. The wealth of information on BP is immeasurable

I've read and learned quite a lot while scrolling through this site, and figured I'd create an open forum to (hopefully) offer some help and advice back to the BP community.

I'm a CPA in New York with a passion for real estate and I'd be happy to answer any tax questions I can!

Nicholas Aiola, CPA in New York (#119518)

Hello @Nicholas Aiola ! Many thanks for being open to questions. I have a question regarding HELOC and PLOC debt pay back in Oklahoma.

We are looking at a subject property of interest and running the numbers. The funds are available via HELOC and PLOC. The question I have is how to pay the monthly balance of the Lines of Credit?

Can we use funds available out of our business operating account to pay on personal accounts (My first thoughts... No). If no, How do the lines of credit get paid on until Cash-Out Refi?

Thanks again!

Updated 4 months ago

Upon further research: One can use their business account (rental income) to pay back HELOC. The payment to HELOC will be a draw on the business account and will be taxed as such. I like how I am having a discussion with me, myself, and I.

Updated 4 months ago

I am finding that the Lines of Credit are paid off using rental income. So I ask, if rental income goes into business account, how do these funds payoff HELOC & PLOC to remain legal and maximize tax return?

Hi, @Nick White !

There are two aspects to your question as I understand it: cash flow and tax implications.


For purposes of cash flow, LOC payments can technically be made from anywhere you want. Does that mean they should be made from your personal account? No. Ideally, you should pay the LOC payments with the rental income of the newly acquired property, which brings me to the tax implications...


Interest on the LOC will be deductible against the rental income of the newly acquired property (assuming you use all the LOC funds to purchase and/or improve the new property), which is why it makes the most sense to pay it using rental income.

I hope this helps!

Nicholas Aiola, CPA in New York (#119518)

Please explain the changes for pass-through entity taxation under the proposed tax plan.  And should we move personally owned properties into LLCs because of it?  And when...what tax year?  Thanks.

@Mike Dymski In the most updated Senate bill, the proposal for taxation of pass-through income is to keep the income taxed at ordinary rates (which were modified), but offer a special 23% deduction on qualified pass-through income. This 23% deduction, however, is limited to 50% of W-2 wages or guaranteed payments paid out of the pass-through entity.

That's a problem for buy & hold investors. Why? Because usually, rental properties are held either in the name of the owner or in an LLC and, in those cases, wages are rarely paid (wages are required to be paid for S Corps, not LLCs). So, this all but eliminates that "special" deduction for buy & hold investors.


Keep in mind, this is not yet law. Apparently, the GOP said earlier today that they have reached a deal on the tax bill (whatever that may mean), so this could possibly change (again) once that news breaks. If this part stays as is, it's slated to take effect beginning January 1, 2018.

Nicholas Aiola, CPA in New York (#119518)

@Nicholas Aiola

Whatever the final bill is, will it start with our 2017 return?  2018 return?

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Originally posted by @Nicholas Aiola :

@Mike Dymski In the most updated Senate bill, the proposal for taxation of pass-through income is to keep the income taxed at ordinary rates (which were modified), but offer a special 23% deduction on qualified pass-through income. This 23% deduction, however, is limited to 50% of W-2 wages or guaranteed payments paid out of the pass-through entity.

That's a problem for buy & hold investors. Why? Because usually, rental properties are held either in the name of the owner or in an LLC and, in those cases, wages are rarely paid (wages are required to be paid for S Corps, not LLCs). So, this all but eliminates that "special" deduction for buy & hold investors.


Keep in mind, this is not yet law. Apparently, the GOP said earlier today that they have reached a deal on the tax bill (whatever that may mean), so this could possibly change (again) once that news breaks. If this part stays as is, it's slated to take effect beginning January 1, 2018.

Thanks Nicholas.  Any line of sight on why they killed the 25% max rate on pass-through entities?  I thought the intent was to provide some parity between the new lower corporate rate and the pass-through rate.

Good afternoon @Nicholas Aiola. My question to you is will you get taxed differently from a buy and hold vs a wholesale or flip standpoint?

@Mike Dymski The House initially proposed the max rate of 25% on (most) pass-through entities; the Senate countered (I would guess as a compromise to the slashed corporate rates) by initially proposing a 17.4% deduction instead of capping the rate, but Senators Ron Johnson and Steve Daines were holding out on their "yes" votes. 

In the extremely speedy process of updating the proposal once again, the Senate bumped the deduction up to 23% to satisfy Johnson and Daines.

As with everything tax, there are stipulations, exceptions, and, because the changes to the proposal were so rushed, a huge opportunity to identify loopholes, so that should be fun.

Nicholas Aiola, CPA in New York (#119518)

Hi, @Demario Lewis  

Great question... The answer is yes.

Buy & hold rental income is considered passive income, reported on Schedule E, and taxed at ordinary rates. Selling a property you held and rented out will be subject to capital gains tax (and depreciation recapture).

Flips and wholesaling are treated as active businesses, reported on Schedule C, taxed at ordinary rates, AND subject to self-employment tax. Selling a flip is taxed at ordinary rates, not at the capital gains rates, because the IRS treats properties as inventory in this case...basically like buying and selling goods.

Nicholas Aiola, CPA in New York (#119518)

@Nicholas Aiola so if I'm reading that right, there are no NEW tax advantage/disadvantave for holding in an LLC (standard LLC, not S/C Corp)

And yes, CPAs, EAs, and tax accountants are going to be worth their weight in gold next year with the potential for a number of loopholes!

When is a good time to sell money losing stocks during the year to offset capital gains taxes? Are there caveats and limits?

Hello @Nicholas Aiola . If a primary residence is sold in 2018 (bought in 2016) and meets the two year capital gain exemption during the same year be grandfathered in the new tax plan or would you have to pay capital gains taxes in 2019 for the 2018 sale because of the new five out of eight years requirement? I do understand the new tax plan is not final but was wondering if you are aware of any information regarding the the new tax rules applying for new purchase only or for all homes.

Thanks,

Simon

@Paul G. Depending on the structure and activity of the LLC, that 23% deduction could apply. I was making a general statement that rental LLCs don't typically pay guaranteed payments to their members and, in that case, the 23% deduction would not apply.

There is an exception (of course), however... If the business owner's income is less than $250,000 (single) or $500,000 (married filing joint), the wage/guaranteed payment limitation does not apply. In this case, there would certainly be a benefit (the 23% deduction).

So, it would depend on the scenario, but I wouldn't say there are no new advantages or disadvantages; it really depends on the entity.

Nicholas Aiola, CPA in New York (#119518)

@James Canoy Typically, it's a good idea to sell the "losers" when you've also sold some "winners" throughout the year. When you sell them isn't really that important, as long as it's in the same year as the gains you're trying to mitigate/eliminate.

Capital losses can wipe out 100% of capital gains. If your losses exceed your gains in any given year, you are allowed to deduct up to $3,000 against your other income. Anything in excess of that can be carried over into future tax years.

Does this answer your question?

Nicholas Aiola, CPA in New York (#119518)
Originally posted by @Nicholas Aiola :

@Mike Dymski In the most updated Senate bill, the proposal for taxation of pass-through income is to keep the income taxed at ordinary rates (which were modified), but offer a special 23% deduction on qualified pass-through income. This 23% deduction, however, is limited to 50% of W-2 wages or guaranteed payments paid out of the pass-through entity.

That's a problem for buy & hold investors. Why? Because usually, rental properties are held either in the name of the owner or in an LLC and, in those cases, wages are rarely paid (wages are required to be paid for S Corps, not LLCs). So, this all but eliminates that "special" deduction for buy & hold investors.

You are aware of the exception for "small investors" making less than $500,000 on their individual return, right? 

Hi, @Septimiu Sarca . If your personal residence is sold after January 1, 2018, you will immediately be subject to the new law. There is one and only one exception, however... If you have a written binding contract in effect before 1/1/18, but the sale closes after, you will be allowed to use the "old" 2-out-of-5 law.

Nicholas Aiola, CPA in New York (#119518)
Originally posted by @Nicholas Aiola :

@James Canoy Typically, it's a good idea to sell the "losers" when you've also sold some "winners" throughout the year. When you sell them isn't really that important, as long as it's in the same year as the gains you're trying to mitigate/eliminate.

Capital losses can wipe out 100% of capital gains. If your losses exceed your gains in any given year, you are allowed to deduct up to $3,000 against your other income. Anything in excess of that can be carried over into future tax years.

Does this answer your question?

 Yessir. I’m assuming I can use stock losses to offset real estate capital gains? Can I buy back the stocks at a lower price or do I need to wait over 30 days?

And thanks for answering my questions. If you ever head to Kingston I’ll buy you coffee. 

@Nicholas Aiola

Thanks for offering to field Tax Questions in these times of great tax changes!

What do you think about the SALT tax deduction elimination, specifically in places like NYC?

Will high Income earners get hit hard in NYC?

I know this is all opinion, but do you anticipate a migration to non-Tax States? Or do you think this fear is a bit overblown? Just curious and I am fully aware that this is just an opinion!

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