All Forum Posts by: Ashish Acharya

When you sell your investment property and execute a 1031 exchange, your suspended passive activity losses (deferred under the $150,000 AGI limitation) generally remain suspended because the activity is not considered fully disposed of in a taxable transaction, the losses continue to carry forward into the replacement property. You only regain (free up) those losses when you completely dispose of the rental activity in a fully taxable transaction (e.g., selling the replacement duplex without doing another 1031). At that time, the losses are deductible against other income and are not taxable themselves instead, they reduce your taxable income.

• If you complete a 1031 exchange: suspended losses stay attached to the new property and do not show up in your personal return yet.
• If you sell in a fully taxable transaction (no exchange): all suspended passive losses are released and deductible, directly lowering taxable income for that year.

From a tax perspective, your property may be more valuable than it appears on the surface, even with little or no cash flow. Depreciation and interest deductions can generate paper losses that reduce your taxable income, and those losses either offset other income now or accumulate to offset gains later. Selling, however, would trigger depreciation recapture and capital gains tax, unless you use a 1031 exchange.

• Depreciation deductions: Annual write-offs lower taxable rental income, sometimes showing a “loss” even if cash flow is flat.
• Passive activity losses: Losses may offset up to $25k of other income if AGI < $100k, or else carry forward to offset future rental gains or sale.
• Mortgage interest: Even at a low rate, deductible interest further reduces taxable rental income.
• Exit taxes: Selling means depreciation recapture (25%) + capital gains tax, unless you exchange into another property.

On the flip side, keeping the property locks up equity that may not be growing, especially if rent increases stay muted due to apartment competition. You’d keep your sub-3% mortgage, but your return on equity could be low compared to what you might earn if you sold and reinvested elsewhere.

• Suspended losses: If you can’t use rental losses now, you’ll still use them to offset gains at sale.
• Step-up in basis: Holding until death wipes out both recapture and gains for heirs.
• Opportunity cost: Capital tied up in a flat-growth property may earn more in other investments.
• Irreplaceable debt: Once you sell, you’ll never get that sub-3% rate back in today’s higher-rate world.

You don't need both units of your duplex to be short-term rentals in order to use the STR loophole. The key is to treat your Airbnb unit separately from your long-term rental. The long-term side will remain passive, but if you materially participate in the STR (100+ hours and more than anyone else) and meet the average stay test, those losses can be considered non-passive and used to offset W-2 or other active income.

• The long-term unit = passive activity, losses suspended unless you qualify for REPS
  
• The short-term unit = can qualify for the STR loophole if average stay ≤ 7 days (or ≤ 30 with services) and you materially participate
  
  • Keep the STR activity reported separately to preserve the loophole
    
  • STR losses can offset active income, while long-term rental losses remain passive

@Nicole Pier
It is legal to transfer a lot from personal ownership to a C corporation via quitclaim deed and then sell it, but the IRS generally treats the transfer as a taxable event under IRC §1001 at fair market value (FMV). This means you may owe capital gains tax on FMV minus your basis, with rates depending on how long you held the property, long-term gains are taxed at 0%, 15%, or 20% (plus 3.8% NIIT), while short-term gains can be taxed at ordinary income rates up to 37%.

IRC §351 may allow tax-free treatment if you receive stock and retain at least 80% ownership, but a quitclaim deed without issuing stock usually fails this test. If no consideration is given, the IRS could treat it as a gift, though in practice it is generally treated as a sale since you control the corporation.

Once transferred, the corporation's basis becomes FMV, and when sold, the gain is taxed at the flat 21% corporate rate under IRC §11 (e.g., $200K sale – $150K basis = $50K gain → $10,500 tax).

If the corporation distributes profits, you face double taxation: first the 21% corporate tax, then shareholder-level tax on dividends at 0%, 15%, or 20% plus 3.8% NIIT. For example, if a $50,000 gain is taxed $10,500 at the corporate level, the remaining $39,500 distributed as dividends could trigger another $9,401 of personal tax (23.8%), bringing the total tax to $19,901 (a 39.8% effective rate). 

By comparison, selling personally at a $100,000 gain may result in $23,800 of tax at 23.8%. If you first transfer then sell, the combined tax could be $22,400 if profits stay in the corporation, but $31,801 if dividends are paid. Retaining profits avoids immediate shareholder tax but may not fit your financial goals.

The IRS may scrutinize such transfers under the step-transaction or substance-over-form doctrines if the move appears solely tax-motivated. State rules also apply—some states impose transfer/documentary taxes (e.g., California charges $1.10 per $1,000 of value), along with corporate or personal state income tax. Timing is critical: the transfer must occur before a sales contract is in place, and proper documentation (corporate resolutions, stock issuance, business purpose) is essential. 

Alternatives include selling personally and contributing proceeds to the corporation, or using an S corporation or LLC to avoid double taxation, though these structures come with eligibility and compliance requirements. You could also explore alternative payout methods (e.g., salary, shareholder loans, or redemptions) instead of dividends, each with its own tax impact.

The best course is to consult a tax attorney or CPA experienced in real estate and corporate taxation.

Provide them with purchase price, FMV, expected sale price, your tax bracket, and the corporation's financial details to determine whether retaining profits in the corporation delivers a true tax benefit versus a personal sale.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

@James Ryan

James, you’re right to be thinking about this now. Because you’re a high-income W-2 earner, depreciation (including cost segregation) usually won’t reduce your wages directly. The IRS passive activity rules put those losses “on ice” until you either sell the property or have other passive income to offset. That doesn’t make them useless, it just makes them a timing play.

Where cost segregation does move the needle:
• If you have other passive income (like other rentals or syndications), those losses can offset it.
• If you or a spouse qualify as a Real Estate Professional, the accelerated depreciation can reduce your W-2 or business income.
• Short-term rentals can sometimes sidestep the passive rules if you materially participate, letting you use the deductions right away.
• When you sell, all those suspended losses unlock and can wipe out much of your taxable gain.

So in your case, if this is your first rental and you’re staying strictly W-2, cost seg might not save you tax in the short run, it just shifts deductions forward. But if you plan to keep investing, pursue REPS, or hold short-term rentals, stacking depreciation early can be a powerful strategy.
This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

@Patience Echem 

When accounting for CapEx on rental properties, you don’t need to hold the funds in a separate account, but it’s helpful to track them separately for planning purposes. CapEx must be capitalized and depreciated over 27.5 years for residential properties, and it’s not immediately deductible. Depreciation is reported on Schedule E (Form 1040), and bonus depreciation allows immediate deductions for qualifying property, such as appliances, but structural improvements like a new roof must be depreciated over time. While you don't need a separate account for CapEx funds, it's important to track your expenditures and the date placed in service for accurate depreciation.

Properly tracking and capitalizing your CapEx ensures you comply with IRS requirements and maximize your tax deductions. Depreciating these expenses over time can reduce your taxable income, while bonus depreciation offers an opportunity for larger, immediate deductions on certain assets. Staying organized and consulting with a tax professional will help you manage these deductions effectively.
This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

@Victor N. 

When investing in rental properties through your LLC, you can deduct a variety of business expenses that are ordinary and necessary for managing and maintaining the properties. These deductions can significantly lower your taxable income, but it's important to ensure your expenses meet IRS guidelines. There's no strict limit on deductions, but you need to keep accurate records and follow the rules to avoid any issues with the IRS.

Here are the key deductions you can claim:

• -Mortgage interest is fully deductible.
• -Property taxes are deductible in full.
• -Repairs and maintenance costs, such as fixing leaks or replacing appliances, are deductible.
• -Utility payments for tenants are deductible if you pay them.
• -Fees for property management are deductible.
• -Depreciation is deductible over 27.5 years; 100% bonus depreciation is available for certain assets.
• -Legal, accounting, and other service fees are deductible.

There’s no cap on deductions, but passive activity loss rules may apply if your expenses exceed income. If you qualify as a real estate professional, you can avoid some limitations. Make sure to keep your W-2 income and rental income separate on your tax return for accuracy.

By staying organized and consulting with a tax professional, you can maximize your deductions while staying compliant.
This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

@Zeni Kharel 

When you're considering buying a home, there are several tax strategies and considerations to keep in mind during the pre-purchase phase. Here's a rundown of key factors:

1. 1.Mortgage Interest Deduction: Mortgage interest is typically deductible on your primary residence and second home, but keep in mind that you are limited by the $750,000 loan amount ($375,000 for married couples filing separately). This threshold is for homes purchased after December 15, 2017. For homes purchased before that date, the deduction limit is $1 million.
2. 2. Property Taxes: Property taxes are deductible, but the total combined state and local taxes (SALT), including income or sales taxes, is capped at $40,000 ($20,000 for married couples filing separately). This cap applies to both primary and rental properties.
3. 3. House Hacking: If you plan to rent part of your home (such as renting out a basement or spare room), you may be able to deduct a portion of the home’s expenses like mortgage interest, utilities, and repairs. The key is to allocate expenses between personal and rental use properly.
4. 4. Capital Gains Exclusion: If you sell a home, you can exclude up to $250,000 ($500,000 for married couples) of capital gains from the sale of your primary residence, as long as you meet the ownership and use tests. The home must have been your primary residence for at least two of the five years preceding the sale.
5. 5. Deducting Home Office Expenses: If you are working from home and use part of your new home exclusively and regularly for business purposes, you may be eligible to claim a home office deduction. This can include a portion of the mortgage interest, property taxes, utilities, and depreciation.
6. 6. Pre-Purchase Considerations:
   • Review your current tax situation: Consider how buying a home will affect your overall financial picture, including deductions and credits.
   • Prepare for closing costs: These costs may be deductible if the property is used for rental purposes. Closing costs on personal residences are generally not deductible but can be factored into your cost basis for future capital gains calculations.
7. 7. Consider Entity Structuring: If you're purchasing the property as part of a real estate investment strategy, consult with your CPA about entity structuring. Holding the property in an LLC or other entity by default will NOT provide tax benefits. Don't use wrong entity structure as it might hurt you.

By keeping these strategies in mind, you can optimize your tax situation during the home-buying process.
This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

@Alex Murkes

K-1s from funds can be messy, especially when they list multiple lower-tier LLCs. Don't worry about the $2 mismatch between Box 1 – Box 2 and the breakout schedules that's just rounding or small allocation differences, totally normal and nothing the IRS cares about. For data entry, TurboTax recommends separate entries for each LLC because technically each one has its own EIN and QBI allocation, but you're not required to do it that way.

If you only enter the fund itself, you’ll usually end up with the same tax result, but you may lose some precision in how QBI is calculated.

• - Small mismatches = rounding, not an error
• - entries = “gold-star” accurate for QBI
• - One fund entry = simpler, usually fine in practice. If K-1 reports activity separately, you can report them separately.

As for allocating other boxes like interest, dividends, and deductions, if the K-1 notes don’t give specific instructions, it’s standard to keep them at the fund level.

The detailed breakout schedules usually only matter for business and rental income. So you can safely attribute Box 5 interest, Box 6a dividends, and Box 13 deductions to the main fund entry instead of trying to spread them across the underlying LLCs.

• - Interest & dividends → stay at fund level (not QBI)
• - Box 13 deductions → usually fund level unless told otherwise
• You should work with tax professional for this.
• This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

@Michael Murphy

When deciding whether to amend prior returns for misclassified closing costs, you’re really weighing accuracy against practicality. Unless we are taking about material closing costs, we should not be amending in this situation.

The IRS generally limits amendments to the last 3 years, and anything older is often “closed” unless there’s fraud or a large omission. Since closing costs affect property basis and depreciation, you want to correct them, but that doesn’t always mean filing five years of amended returns.

A balanced tax approach is to amend recent years if material, consider a Form 3115 method change, and otherwise make a forward correction with clear documentation.

• - Refund claims are usually limited to 3 years (or 2 years from payment), so older years may not benefit from amending.
• - A Form 3115 can allow a §481(a) adjustment without reopening every year and is often the cleanest way to fix systemic errors.
• - If the errors are significant, amending is safer; if minor, document them and correct going forward.
• - Many CPAs will amend 2–3 years if there’s a benefit, then fix basis and reporting prospectively.
• This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.