All Forum Posts by: Anita Smith

Thanks Joe. Design hours were for a renovation (more or less a flip) on a home purchased in Branson. Thankfully, repairs vs. expenses have always been detailed out separately, and the 2016 depreciation schedule for the house in Virginia was set up the way you describe. The repairs in 2019 were on the home that just sold, and then there have been additional improvements and repairs in 2020 on that home before it sold. I've asked to have my time log, taxes and depreciation schedules since 2015, and everything else reviewed as part of this process as well. After all that is done, I will try to come back and post what the end results/decisions/advice are. Thanks again for weighing in!

Sorry Joe, that I did not take the time to read your response more fully before (It was after 13 exhausting hours of time on the computer and on the phone that I read your response, and did not have the time to really absorb it.) Thanks for the advice. Regarding the time spent, I don't know if it would be called property management, or house flipping, or what - because most of the hours came from planning and designing the renovations (of which I can prove because of the extensive design program files, etc.) and then the bulk of the rest of the hours were from either actively managing said renovations and repairs (recorded down to the minute for each phone call, etc.) or mostly from doing much of the work myself. I practically killed myself working on some of these renovations - my knees and back still haven't forgiven me. The management hours are minimal, about 1.5 hours per month per property for the bookkeeping, scheduling repairs, etc.

Thanks @Michael Plaks. I was actually surprised I could get time with him. He seems like a super nice guy, by the way. I'm excited to speak with him later.

Thank you Eammon, I didn't mean to sound dismissive. Tone does not convey well in the internet. I really did mean 'I don't see how an auditor would see it as a benefit to us?' as a question, but I absolutely see now how that sounds dismissive. Admittedly, I was getting a bit frustrated because I was hoping for answers like, "I've had a similarly complicated issue, and x helped me out." The gift tax concerns, etc. may be a real issue there, and is something I will bring up - thanks for mentioning that. I also didn't know/consider the rules regarding self-promotion on BP here, so I see now how it was not going to work to connect in the way I was hoping with someone through a forum like this.

Unfortunately, I'm being pressured to file this return ASAP, because we are in the process of getting a new VA home loan, and they need to pull transcripts for two years from the IRS, and they don't want to use our 2017/2018 returns, they want 2018/19. I wish I could just bury my head in the sand and file it since we are under a time crunch and it would also benefit us financially with a refund. However, I have no confidence in it and have already caught several grievous errors, and I know it's not enough to argue to an auditor "well my accountant said we could!" since we would be the ones to pay dearly if her advice was bad. Unfortunately, since I already recognize that some of the advice was bad, it's impossible to move forward on filing it even after the errors that I caught are corrected. That's why I'm willing to pay for a second opinion, just to make sure we have our bases covered.

I'm just frustrated that we sought out a new CPA this year specifically for this issue and to do our returns. What I needed was the type of person who can say: "I don't know the particulars on this one issue, but I can find out." What I got was the type who answered everything and spoke with confidence, but whose advice didn't even stand up to light research and scrutiny. I'm not sure how to proceed on the return, if I can ask for my money back and have someone else file it, or if I should just walk her through all the corrections step-by-step after this call later and never work with her again.

All that is to say why I went directly to Mr. Nitti. Given I don't have the time to 'try out' someone else again, I wanted to turn to someone that other CPAs would look to for help in this scenario. I'm not saying he's the only one in the country who could help me - of course not. But he's the only one I could immediately spot in a short time frame, who I knew I could have 100% confidence in his answer. After enough bad experiences, the confidence is worth extra to me - since I've been mislead and screwed over by other professionals that I paid for expert advice, just to find out later by someone else they were not correct at all.

Given that he teaches the topic and writes on it, even I could tell he was a clear expert, and I knew I would not have to wonder if his advice would come back to bite us after the fact. That's not to say I believe I would get bad advice from another professional on here - it just means it's for my own sanity so I don't have to sit and wonder if it was accurate or not. (Also, I dread the talk with the current accountant when I tell her everything that is wrong with the return and her advice - I hate calling people out like that. And since I can only assume it will be rebutted with: "Well how do you know this other person knows any better?" It would be nice to respond with, "Because it was from Tony Nitti.")

I had found him and reached him through Rubin Brown, he was immediately responsive, which I was surprised since I assumed it would be a shot in the dark to get time with him. That's when I said I'd be paying for his advice because I got an appointment with him for a call today. If I have time, I can try to come back and post some of the conclusions from it, so it can be searchable and maybe help other people.

Anyway, thanks @Eamonn McElroy, and sorry if my frustration of the situation made me dismissive of you. Yours was a great answer.

Oh my goodness. This was a question for tax year 2019 to become a real estate professional, not 2015. I kept contemporaneous hour records in 2019. I was just laying out key history and numbers because the real question also has to do with the sale of the properties, and certain dates and numbers to someone who could help. I am not trying to fudge on my taxes. I could easily have just shrugged and went 'duh, sounds good to me' and let this new CPA file my taxes the way she prepared them (because it would actually GREATLY benefit us if I could just take her word for it!). I'm actually trying to do my due diligence here and cover all bases. I already paid for my taxes to be prepared, and now I'm going to be paying for yet another CPA an exorbitant amount to give advice on them before they are filed. I was just hoping to connect with someone here - but no such luck. 

I actually found the very CPA and tax professor who wrote that article I referenced in my question. For what it's worth, that article is a good read, as it lays out multiple scenarios - including where even the IRS gets confused in some cases.

Sorry if the question was confusing to people. I will now be paying for Mr. Nitti's advice.

Yeah, this post was kind of an attempt to fish for a new CPA who can help with proactive planning now. I know it's not a matter to be taken lightly, which is why I'm waiting to file this return - because even though the CPA is confident in her answers, I am not.

As for the unit where my parents live, I don't consider it a 'unit', but instead a secondary home or something like that, since we are not writing off anything associated with that half of the property on our taxes and are not getting any tax benefit from it, so I don't see how that is a tax concern? I don't think an auditor would care, because again - no tax benefit, no write-offs, nothing. . . it just happens to be the other half of a duplex that we rent - meaning it causes all associated expenses, etc. to be taken at 50% instead of 100%. For tax purposes, it could even be considered like WE live there, because tax-wise, it's treated the same. (As in, no benefit.)

Ah, forgot to mention - as for my parent's house, we only take 100% of expenses for repairs that ONLY happened within the rental unit or only benefit the rental unit, and only 50% of improvements that improve the whole house (like siding) that improves the rental side as well. There are no tax benefits taken for the home in which my parents live. Only 50% of the mortgage interest, and 50% of the property taxes are taken as well. I have saved a file of similar homes and rent prices in my tax file to show that it is rented at fair market value.

I'm a 1099 contractor (sole prop.), last year my hours were less than 400 total. All the repairs I mentioned were expensed, not depreciated. Everything I call an 'improvement' are those which were depreciated.

Still hoping for advice on aggregating the properties, etc. if anyone can help with that.

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!!

Thanks so much - I think we will do that.