Question for an attorney or CPA? I'll pay for the advice
I picked up a new tax accountant this year hoping to get help with this issue... and not only are multiple things incorrect on the return I just got back to review, but some of her advice seems *off.* (For example, I was advised if I just get a real estate license, I no longer have to worry about the 750 hour per year IRS requirement. I researched it on my own and found out that that's not true.) All that aside, I'll pay for advice on this! I just need a very knowledgeable CPA or attorney to let me know their thoughts...
Here's the setup to my question:
We bought a home in 2012 in VA for $340,000. To make the math simple, improvements alone in the 8 years since (kitchen, bathrooms, roof, windows, doors, deck, etc.) =$90,000. There have also been significant repairs and other expenses since, but those have already been taken on previous tax returns, obviously with the exception of this year (see below). The house was converted to a rental in 11/2015.
For 2020 alone in expenses, we had $27,000 in repairs, that's not touching the closing costs, realtor's commission, etc. [Yeah...that house was a dreadful money pit, and we got majorly screwed into majorly overpaying for it as first time homebuyers 8 years ago, and we learned a lot since, but that's not the topic here...]
Anyway, all that is to say, the cost basis for that house alone should be $440,000, just counting the purchase price and improvements, correct? So, despite the recoup of depreciation, etc., given that the house sold for $414,500 (and we had all the other expenses this year, being some 30k+), that house should absolutely be a tax loss, correct? (I know, probably a dumb question, but I want to make sure I'm not thinking of this the wrong way.)
Second, we purchased a home in Branson, MO this year. It was intended to be a vacation rental, but for certain reasons (a different property we're getting into now) we need to sell it. In the best case scenario, the profit from that sale after the renovation we just did may net $25,000 at BEST (giving best case, for tax purposes.)
(This is for my 2019 return, which is on extension waiting to file):
2019 was the first year I made enough hours (~800) actively managing three properties, and it was significantly more hours than I put into my little side job. (So it became my primary activity).
The third property we own is a duplex in Colorado. My parents live in one side rent-free (and retain a life estate on the property). My brother rents the other half. I don't remember what the purchase price was on that, but say around $290k.
So... I can make the election as a real estate professional. Most of my info I'm basing this on is from this lovely article, if anyone cares:
https://www.thetaxadviser.com/issues/2017/mar/navigating-real-estate-professional-rules.html
So, I do understand that just making the election as a real estate professional does not necessarily mean that the properties are treated as non-passive, per se.
Here's my question:
If the properties are treated as non-passive this year, is there any way they can they go back to being passive for the 2020 tax year? Say, if I don't make the hours this year - OR especially because I want to pit the loss of the Virginia house against the gain of the Branson house. That's the scenario I would probably most prefer. I know I can do a sec. 529 exchange for the property we are about to purchase, but I'd rather not defer tax, when in this particular year tax could be avoided all together if it's treated as passive and I can pit the loss against the gain.
This tax accountant says I can do non-passive this year and passive next. (I'm wary to believe that, due to other bad advice and mistakes on my return.)
Also, I'd probably rather not aggregate the three properties, since based on that article:
If a qualifying real estate professional makes the election to aggregate all rental activities for purposes of measuring material participation, the combined rental real estate activity is treated as a single activity for all purposes of Sec. 469, including the disposition rules of Sec. 469(g). Ordinarily, Sec. 469(g) allows a taxpayer to deduct any suspended passive losses attributable to an activity when substantially all of the activity is sold in a fully taxable transaction. When a qualifying real estate professional elects to aggregate all rental activities, however, because the combined rental activity is treated as one activity for purposes of Sec. 469(g), passive losses attributable to a disposed activity are not freed up until substantially all of the combined rental activity is sold.
So, what counts as 'substantially all' to the IRS? Two of our three properties would be sold this year. Is that substantially all to be able to free up the loss? The only one remaining would be the duplex in Colorado, of which only one unit (50%) is considered a rental property.
Basically, I really need advice regarding the election to aggregate all properties or not, and whether to have them treated as passive or non-passive, given what will happen in the 2020 tax year with the sales. If it's passive, and I am a real estate professional, do I still get to write off all the losses against our income in 2019? Or does it have to be real estate professional + nonpassive for that?? (I do pass the material participation tests for each property, I believe).
If there is a CPA who is VERY knowledgeable in this stuff, I'd love to find a new tax accountant. We already paid for this year, but I want to find someone else for 2020 going forward!!