2018 Tax Horror Stories

51 Replies

I hate to be a downer, but with a significant overhaul of the tax code recently we are seeing first hand some RE investors (and individuals) get hit with huge tax bills and sometimes penalties.  There are tremendous benefits in the new tax code, but can be very challenging if you're not working with a pro.

Was curious to hear some "horror stories" out there.  Maybe cautionary tales that can save investors tens of thousands of dollars in mistakes.  I'll provide one we came across....

We met with an investor who cashed out all of their retirement accounts (under 59.5 years old) to invest in an opportunity zone.  The problem was it was not a qualified opportunity zone FUND, they just bought the  properties and proceeds from retirement accounts are not capital gains!  Throw in the 10% penalty in addition to the income taxes owed on the distribution and these individuals found themselves with close to a 6 figure tax bill.

Originally posted by @Kevin Gray :

I hate to be a downer, but with a significant overhaul of the tax code recently we are seeing first hand some RE investors (and individuals) get hit with huge tax bills and sometimes penalties.  There are tremendous benefits in the new tax code, but can be very challenging if you're not working with a pro.

Was curious to hear some "horror stories" out there.  Maybe cautionary tales that can save investors tens of thousands of dollars in mistakes.  I'll provide one we came across....

We met with an investor who cashed out all of their retirement accounts (under 59.5 years old) to invest in an opportunity zone.  The problem was it was not a qualified opportunity zone FUND, they just bought the  properties and proceeds from retirement accounts are not capital gains!  Throw in the 10% penalty in addition to the income taxes owed on the distribution and these individuals found themselves with close to a 6 figure tax bill.

well that was a big boo boo not talking to their accountant first.. 

I paid everything I could pay in last week of 2017  to get the right off  IE state tax and prop tax etc.. the SALT is a major issue and I still cant believe Trump administration thought that was a good idea..   it caused me to move out of Oregon and relocate to NV with no state income tax.. at least as it relates to my income outside of Oregon..  also Vegas is seeing a big run from Socal folks moving here that work out of their homes etc..  Its an issue.

I participated in the Gozone tax structure last decade.. and just like what your talking about many went of half cocked and bought properties in the go zone but they did not qualify to take the deduction. and a gozone election was a almost guarantee that your file would be pulled for audit mine was.. my guy was in and out in 30 minutes..  

Lotta terrible Tax pros out there as well, so carefully vetting who you hire is just as important as making sure you follow the rules. 

This thread is perfect for @Natalie Kolodij

Originally posted by @Alexander Felice :

Lotta terrible Tax pros out there as well, so carefully vetting who you hire is just as important as making sure you follow the rules. 

This thread is perfect for @Natalie Kolodij

I'm sure you didn't mean this, Alex - but you mentioned terrible tax pros and Natalie in the same post.  What??? For the benefit of others, Natalie is not in that camp!  

I see a lot of over-sophistication with primary homes. People placing their primary into an entity, not realizing it may screw up their sec 121 cap gains exclusion when they go to sell.

I also see people wanting to sell a bunch of long-held property in the same calendar year, or did, without thought to the tax implications. 

I also see a lot of cost segregation, turning a huge amount of their gain at exit into depreciation recapture @25% vs long-term cap gain at friendlier terms.  My $.02.

@Steve Vaughan  Thats a great point, i didn't realize the depreciation rate was substantially higher than the cap gain.  I wish i was more knowledgable about taxes. I use a pro , and have read some books but long term strategy and planning is something i always need to try and brush up on. 

While a 1031 is good to defer gains if you end up not doing it then it all comes do.  I havent dont a 1031 , would like to , but i will never take a junky deal if i cant get the stars lined up. I have tried before and placed funds with an intermediary but no go. 


My take away was from either John Reeds book or Riche Weeses book.  If you die and pass on the properties, the properties are stepped up to their current market value basis and thats how you win ( other than you die...) Id have to revisit that again. 

So while depreciation can be great as you go through the years, my take away was, you are just repositioning the liability to a later date ( without 1031 scenario ) 


Thank you for the post. 

Originally posted by @Steve Vaughan :
Originally posted by @Alexander Felice:

Lotta terrible Tax pros out there as well, so carefully vetting who you hire is just as important as making sure you follow the rules. 

This thread is perfect for @Natalie Kolodij

I'm sure you didn't mean this, Alex - but you mentioned terrible tax pros and Natalie in the same post.  What??? For the benefit of others, Natalie is not in that camp!  

I see a lot of over-sophistication with primary homes. People placing their primary into an entity, not realizing it may screw up their sec 121 cap gains exclusion when they go to sell.

I also see people wanting to sell a bunch of long-held property in the same calendar year, or did, without thought to the tax implications. 

I also see a lot of cost segregation, turning a huge amount of their gain at exit into depreciation recapture @25% vs long-term cap gain at friendlier terms.  My $.02.

I apologize for my wording, my intent was the opposite

Natalie, someone I regard as a knowledgeable tax professional, loves to share tax horror stories. I was tagging her so she could participate, I was not accusing her. 

This is the only apology you'll get from me in 2019. Hope you enjoyed it ;) 

biggest tax error I see is in the difference between motive of the tax pro and motive of the investor. The Tax guy wants to show no, or negative net income to get his client a tax return. Sounds good right? The investor, assuming they will want to borrow money in the future, wants to show positive net income so they can qualify for lending. This discrepancy causes a lot of declines at underwriting and then forces investors to wait a year (or two) to correct. 

There are facebook groups for tax pros- Kind of nice to have because if you're self employed it lets you bounce thoughts off other professionals. 

Problem is they are filled with "professions" who ask questions (especially about real estate related topics) that show they are clueless...and are getting the basics of their tax education on Facebook. 


Be very cautious who you pay as your "tax professional". 

Most investors on bigger pockets know about the primary home gain exclusion. 

Most investors on bigger pockets know how a 1031 exchange works. 

You know who doesn't know how either work? This tax professional. Who had a client pay him for his services. 

*Note- I just realized the photo doesn't open large enough to read. 

Basically this tax pro just wanted to confirm that his client who had occupied and owned a home for 5 years and then rented it for 1 year. He just sold the home and the tax pro wanted to know if this would qualify as a 1031 (like kind exchange) since he bought a new primary home within 45 days. 

Originally posted by @Steve Vaughan




Vaughan Vaughan:
Originally posted by @Alexander Felice:

Lotta terrible Tax pros out there as well, so carefully vetting who you hire is just as important as making sure you follow the rules. 

This thread is perfect for @Natalie Kolodij

I'm sure you didn't mean this, Alex - but you mentioned terrible tax pros and Natalie in the same post.  What??? For the benefit of others, Natalie is not in that camp!  

I see a lot of over-sophistication with primary homes. People placing their primary into an entity, not realizing it may screw up their sec 121 cap gains exclusion when they go to sell.

I also see people wanting to sell a bunch of long-held property in the same calendar year, or did, without thought to the tax implications. 

I also see a lot of cost segregation, turning a huge amount of their gain at exit into depreciation recapture @25% vs long-term cap gain at friendlier terms.  My $.02.


Steve- thank you for defending my tax honor lol

Alex is on my side I believe- at least, he's mean to me on facebook...so I think we're cool? I've shared some of the uneducated questions "tax pros" ask with him which is why he tagged me here. 

I get very frustrated with the lack of understanding by the average tax pro about REI topics.

Here is a cautionary note that people should be aware of: 

Many wholesalers/ HML's who repo homes prefer to sell them by selling the LLC that holds the property.

That's fine. 

Here's where an unexpected situation pops up - you partner with someone else on the deal. 

Now 2 people own the LLC - And 2 people on an LLC (in most circumstances) is now required to file a 1065 partnership return.

So just make sure to chat with your tax pro/ attorney first to make sure you don't end up needing to file 5 unexpected corporate returns come March. 

So many stories from so called tax experts on here who had no experience prior to opening their business. It costs more to fix it and only hurts the investor.

I'll be running an after tax season special to review and fix the mistakes I've seen.

Originally posted by @Kevin Gray :

I hate to be a downer, but with a significant overhaul of the tax code recently we are seeing first hand some RE investors (and individuals) get hit with huge tax bills and sometimes penalties.  There are tremendous benefits in the new tax code, but can be very challenging if you're not working with a pro.

Was curious to hear some "horror stories" out there.  Maybe cautionary tales that can save investors tens of thousands of dollars in mistakes.  I'll provide one we came across....

We met with an investor who cashed out all of their retirement accounts (under 59.5 years old) to invest in an opportunity zone.  The problem was it was not a qualified opportunity zone FUND, they just bought the  properties and proceeds from retirement accounts are not capital gains!  Throw in the 10% penalty in addition to the income taxes owed on the distribution and these individuals found themselves with close to a 6 figure tax bill.

You have seven posts here and are relatively unknown. I'd advise most here to be wary of reaching out.

The big problem is people do things before asking their accountant and then expect us to fix it afterwards.

Originally posted by @Kevin Gray :

We met with an investor who cashed out all of their retirement accounts (under 59.5 years old) to invest in an opportunity zone.  The problem was it was not a qualified opportunity zone FUND, they just bought the  properties and proceeds from retirement accounts are not capital gains!  Throw in the 10% penalty in addition to the income taxes owed on the distribution and these individuals found themselves with close to a 6 figure tax bill.

Were the properties in a QOZ? 

Originally posted by @Alexander Felice :
Originally posted by @Steve Vaughan:
Originally posted by @Alexander Felice:

Lotta terrible Tax pros out there as well, so carefully vetting who you hire is just as important as making sure you follow the rules. 

This thread is perfect for @Natalie Kolodij

I'm sure you didn't mean this, Alex - but you mentioned terrible tax pros and Natalie in the same post.  What??? For the benefit of others, Natalie is not in that camp!  

I see a lot of over-sophistication with primary homes. People placing their primary into an entity, not realizing it may screw up their sec 121 cap gains exclusion when they go to sell.

I also see people wanting to sell a bunch of long-held property in the same calendar year, or did, without thought to the tax implications. 

I also see a lot of cost segregation, turning a huge amount of their gain at exit into depreciation recapture @25% vs long-term cap gain at friendlier terms.  My $.02.

I apologize for my wording, my intent was the opposite

Natalie, someone I regard as a knowledgeable tax professional, loves to share tax horror stories. I was tagging her so she could participate, I was not accusing her. 

This is the only apology you'll get from me in 2019. Hope you enjoyed it ;) 

biggest tax error I see is in the difference between motive of the tax pro and motive of the investor. The Tax guy wants to show no, or negative net income to get his client a tax return. Sounds good right? The investor, assuming they will want to borrow money in the future, wants to show positive net income so they can qualify for lending. This discrepancy causes a lot of declines at underwriting and then forces investors to wait a year (or two) to correct. 

 Most of that is resolved with a competent lender and underwriter. 99% have no clue about tax laws or changes in the tax law.  Heaven forbid I bring up cost segregation things go crazy. 

@Kevin Gray I’m not a cpa but I had a newly retired fellow tell me he took 100k out of one his retirement accounts (he’s under 59.5) and then he complained about all the taxes. That sounds like a bad idea to me

A guy we partnered with (his idea) on a flip we did took his cash share of the purchase & estimated rehab out of his 401K. It sat in escrow & was used. Then he bailed on us & we had to buy him out but settled for just the cash invested. Now I hear he's mad at us because of the cashed out tax consequences & that was after getting tax advice from his brother (the sometimes sober) bookkeeper. KARMA!!! 

@Natalie Kolodij I agree with both examples, cost segregation is another excellent tax strategy that often gets overlooked by CPA's and tax professionals. Savvy investors shouldn't have to convince their CPA to consider the additional depreciation deduction numbers. The CPA should be hunting for ways to benefit their client to begin with.

@Kevin Gray Sometimes people forget that they were once a newbie too, take his comment with a grain of salt. Bigger Pockets IS a very welcoming community you'll see! Great forum question by the way Kevin. Last but not least, due diligence is every investor's responsibility.

Originally posted by @Steven Hamilton II :
Originally posted by @Kevin Gray:

You have seven posts here and are relatively unknown. I'd advise most here to be wary of reaching out.

The big problem is people do things before asking their accountant and then expect us to fix it afterwards.

Steve, thanks for fixing us ignorant investors.  And for welcoming new colleagues who are adding value.

@Kevin Gray in your original post you reference changes to the tax code and people getting hit with huge tax bills or penalties. It doesn't sound like your example has to do with changes in the tax code. Whether it be old or new tax code, early cash out of retirement funds can be costly. 

Just from watching posts on BP, I can say most people who get into investing completely lack understanding of taxes. I am sure plenty of CPA struggle too. But of course be careful because "tax preparers" are not the same as CPA. 

My advice is educate yourself AND find a great CPA. That gives you a check and balance on your taxes and ensures you are educated enough to ask smart questions.

Taxes are your largest expense in a business, yet surprisingly people will spend more time learning how to replace a toilet or spend time doing their own demolition work rather than taking time to understand taxes. 

I recommend reading the NOLO book Every Landlords Tax Deduction Guide. I also recommend reading tax guides on the IRS website. I know the material is very dry, but read it two or three times and it will sink in.

Originally posted by @Kevin Gray :

@Steven Hamilton II

Steve, nice to meet you too.  

Obviously I'm newer to BiggerPockets with only 7 posts.  Not a very welcoming environment around here it seems like....

don't worry about all the replies from the Peanut gallery.. just hang in there you will figure out who's who over time.

one thing about BP everyone has an opinion.. and on tax matters half the time the CPAs are all arguing amongst there selves.. 

keep in mind from my cheap seats all the CPA s I have worked with have levels of how aggressive they are comfortable signing off on.

I went through this with my Portfolio interest program for foreign investors.. my long time CpA just could not get behind it.. I since switch and new CPA saw no problem with it.. and I spent 15k on prepping those notes and opinion from top law firm on the subject and my old CPA still argued it could not be done..  so its how a cpa interprets the code.. just like attorneys. until there are final rulings who knows right. 

Originally posted by @Mike Dymski :
Originally posted by @Steven Hamilton II:
Originally posted by @Kevin Gray:

You have seven posts here and are relatively unknown. I'd advise most here to be wary of reaching out.

The big problem is people do things before asking their accountant and then expect us to fix it afterwards.

Steve, thanks for fixing us ignorant investors.  And for welcoming new colleagues who are adding value.

 Mike,

I actually find most investors to  be fairly savvy and asking questions before they do things. There are always the handful of those who don't do so. 

The situation he described had nothing to do with the example he had given.  And a fair warning to others here is reasonable considering they have not been vetted to have at least marginal knowledge. 

Originally posted by @Suly B. :

@Natalie Kolodij I agree with both examples, cost segregation is another excellent tax strategy that often gets overlooked by CPA's and tax professionals. Savvy investors shouldn't have to convince their CPA to consider the additional depreciation deduction numbers. The CPA should be hunting for ways to benefit their client to begin with.

 I'd be happy to explain give the Cost Segregation spiel.   Bonus depreciation is a great benefit. 

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