All Forum Posts by: Angel Maldonado

You mentioned that the property is a STR, you might ask whether it is being reported as active or passive income. Most STR properties qualify as active income but if your CPA has it listed as passive it might not be worth a cost seg because the accelerated depreciation pushes a loss that would be suspended to future years.

I agree with Basit that your CPA should easily be able to explain why the cost seg isn't worth it.

Best,

Hi Matt, it sounds like you have some exciting changes! When making financial decisions it is important to remember not to let the tax tail wag the dog. By this I mean the tax considerations should be made to fit around the best financial and lifestyle outcomes for you, it should not be the lead variable. 

For instance, buying a larger house specifically so you can take a larger tax write off will still probably end up with you spending more money than is necessary. Even business owners with small homes are still eligible to take the home office deduction. Furthermore, the entity choice for your real estate business will affect how you claim this deduction and if you have an office outside your home you might not even be eligible for the deduction to begin with. Make sure you choose a professional who takes the time to listen to your entire situation and your goals before they flood you with recommendations.

Best,

Hi Brittany, cost segregation studies often include an appraisal that allocates a value to land versus depreciable assets. This would typically be expressed as a dollar amount but may depend on your service provider.

If no appraisal is available there are a couple different ways to allocate value to land as opposed to the depreciable building and improvements. The simplest way to do this is probably to pull the tax appraisal from the County Appraisal District (CAD) in the county your property is located in.

This is the appraisal report that the county uses to determine the taxable value of your property. It will include a breakout of depreciable assets (often labelled "improvements") and non-depreciable land (often labelled "unimproved"). Take the ratio of land vs the total appraised value and apply that to the fair market value of your property. If no formal appraisal has been completed to determine total fair market value of your property, you can usually get a solid estimate off Zillow or Realtor.com. Alternatively, you might just provide them with the dollar value of the land as determined in the CAD report.

I hope this helps!

*sorry, used my old account in the original response, this account has my complete profile

Hi RJ,

There is some nuance that goes into determining capitalizing vs expensing expenditures. As a general rule, any item that is an improvement to the property (new windows, roof, sidewalk) would be capitalized and items that are more short term in nature would be expensed (plumbing or HVAC repairs, paint, etc).

Of course, there are times when plumbing, HVAC or paint might be appropriately capitalized so this is where some judgement must be exercised. Think of it more as property improvements (capitalize) versus repairs and maintenance (expense).

Capitalizing all costs will limit your deduction to 80% of the total, in the example you provided that would be a deduction of $56k. In order to maximize your current year deduction you would expense each item that is eligible (full deduction) then depreciate the remaining items that would need to be capitalized (80% deduction).

You can make a tax election to expense items below a certain dollar value that would otherwise be capitalized, this will allow you the full deduction for that item. You might consider speaking to your tax professional about this.

I hope this helps!

Hi Ching, instead of selling and donating the proceeds it would probably be best to donate the entire tract of land as a property donation. If the church prefers cash they can sell the land themselves after you complete the donation. That way you can take the charitable donation as a deduction and avoid the capital gains that would arise if you sold the land before donating it. 

More details are needed to give you a definitive answer so you should consult your tax professional and let them know exactly what it is you are trying to achieve through this transaction.

Hi Nadav,

Sounds like you have some interesting plans! Foreign owed LLCs are subject to different US filing requirements than domestically owned LLCs. For instance if a US resident is the sole owner of an LLC it will be a disregarded entity with no federal tax filing obligation, everything would be reported on the owner's personal tax return.

However if a foreigner is the sole owner of a LLC, the LLC will be required to make a separate tax filing to disclose this even though it is a disregarded entity for tax purposes. Make sure you consult a tax advisor who understands US international tax compliance requirements.

As far as setting up a US LLC, your best bet would probably be to find a good attorney and make sure they understand your current situation and goals. Having a good relationship with professional service providers can be invaluable as you grow your wealth and helps you avoid pitfalls you might not otherwise know about.

Best,

Hi Abhimanyu,

It is difficult to give you a definitive answer with the information provided. It is not clear what exactly you and your parent are trying to accomplish. Does your parent expect a return on investment or are they simply gifting you cash to purchase real estate? If she expects a return on investment does she expect a portion of cash flow from the rents or will she simply wait to collect on the gain from appreciation if/when you sell the property? 

I ask because partnerships are required to withhold income allocable to foreign partners. Withholding rates can vary depending on the type of income and whether or not the US has a tax treaty with the foreign partner's country. If your plan is to funnel all income to yourself and then gift it out to your parent, you should reconsider against this as that seems like a blatant work-around. 

If your parent is really just gifting you the cash and expects nothing in return, then allocating all profits and losses to yourself might be more defensible. But then why would you include your parent in the LLC?

If you both were allocated a portion of the profit/loss, your parent and you would still be able to reap the benefits associated with real estate. There would just be some extra compliance to make sure you stay on the right side of the IRS. The partnership would allocate your income and losses separately to be reported on your personal tax return. In this regard, having a foreign partner will not affect the tax benefits allocated to you, it would be just like any other real estate partnership. However, the LLC would be responsible for additional compliance and your parent would be exposed to US income tax on her share of profit/loss. This seems to be the most legitimate structure, just make sure you hire a CPA who is familiar with the additional compliance requirements to keep your LLC and parent on the right side of the tax law.

Finally, adding your parent to the LLC will generate a form K-1 addressed to her, and she may be required to file a US tax return Form 1040-NR. Make sure both your attorney and tax advisor really understand exactly what it is you are trying to accomplish before you get started. Best of luck!

Hi Allen,

If you are set on moving to larger multi-family properties you might consider selling both single family rentals in a Sec 1031 like-kind exchange and using the proceeds as a down payment on a larger multi-unit property. Sec 1031 is a tax election to defer the taxable gain of your rentals, thus allowing you to use the entire net proceeds to invest in another property. You would need to consult with a qualified tax professional before executing this strategy as Sec 1031 requires significant planning and not every transaction will qualify. This is one area where you definitely don't want to figure it out on your own. I am a CPA and have completed several Sec 1031 exchanges for my clients, feel free to reach out if you would like to discuss your situation. 

Hi Bret,

From a tax perspective the main advantage of two separate LLCs would be the following:

Fix & Flip is subject to self employment tax which can take roughly 15% of your profits ON TOP of regular income tax. This can often be avoided by making the S-Corp election, you will need to consult a tax professional for your specific situation.

Buy & Hold is generally considered a passive business and is not subject to self employment tax. But, it is usually not a good idea to hold long-term real estate in an S-Corp because of tax basis, contribution, and distribution issues that can arise when dealing with appreciated assets in addition to missing out on the "step-up" in tax basis upon the sale of LLC interest or death of LLC member.

All this to say, two distinct LLCs will give you the option to mitigate self employment tax for flipping activity while retaining all the traditional tax benefits associated with buy and hold real estate. You should consult a tax advisor for your specific needs, I hope this helps!

Quote from @Elizabeth Watmough:

Thank you for your feedback.

After leaving W-2 employment last fall for health reasons, my sole sources of income will be from investments and my small business. The original plan was to pursue S-Corp for tax election but I have not filed for the election change. 

I do need to reconnect with a tax advisor and attorney, preferably local or familiar with MA state specifics. 

I appreciate you taking the time to respond; best wishes.

Hi Elizabeth, 

Regarding your small business you will definitely want to speak with a tax professional before making an S-Corp election. Making the S-Corp election brings with it the requirement for additional administrative costs such as running payroll for yourself. Additionally, if you are a sole proprietorship or the only member of an LLC, your small business income is reported on your personal tax return. Making the S-Election means you will have to file a separate tax return for the business. Depending on the profitability of your business, the additional fees of running an S-Corp might cancel out any tax savings you are looking to keep. The S-Corp election can be a great tax strategy but it is not a one-size fits all. I hope this helps!