All Forum Posts by: Brandon Hall

@Ashish Acharya you caught me!

@Account Closed is correct on the wholesaling income. Though wholesaling is likely considered a service based business and subject to the phase outs after taxable income hits $157.5k and $315k (if married).

Side question: what is a trade or business?

@Matt Bode to be considered a real estate professional, your wife would need to work 750 hours and greater than half her time in a real estate trade or business. Additionally, she would need to demonstrate material participation in that trade or business which shouldn't be a problem if she hits the 750 hours via rental real estate activities. 

I don't know how many properties you own, but if this is your first/only rental, then I highly doubt you will be able to justify spending 750 hours operating that rental. 

@Ben Kirchner if you are expecting a CPA to get you a refund larger than the fees you pay, you're not going about this the right way.

For instance, let's assume in 2017 that your tax liability is $20,000 but you only withheld $18,000. Thus, you owe $2,000. It's not the CPA's fault that you underwithheld, but the CPA should coach you in proper withholding so that we're closer to $0 next year.

On the other hand, let's say your tax liability is $20,000 but you accidentally withheld $22,000. You are refunded $2,000 whether or not you use a CPA. 

A CPA should help you reduce your effective tax rate, Line 63 on your 1040 divided by total income, over time. That will be difficult to achieve if you shop around for the lowest price every year and expect them to get you a refund in excess of the fees. 

It's not about the refund, it's about your effective tax rate. And it's going to be difficult to change your facts now that 2017 is over. 

Example: you make $100k and your tax liability is $50k. You withheld $60k so you are refunded $10k. Are you happy? I hope not, because you paid 50% in taxes on every dollar you earned. Yikes.

We have clients that owe $20k every year and are thrilled with that result. 

@Jonathan Duarte there are two requirements the IRS imposes in order for a property to be in service: ready and available.

Once in service, the property is operational and expenses can potentially be deducted as operating expenses assuming they meet certain criteria.

“Ready” for rent generally means that a certificate of occupancy can successfully be issued for your property per your locality’s rules. This means that your major components have been repaired, the structure is in good shape, and the property is habitable.

“Available” means that the property has been advertised for rent. It does not mean that someone has moved in, just advertised.

Most investors wait until the end of the rehab to advertise (make their property available) which all but guarantees that no repair cost will be written off because the property was not placed in service until the advertisement date, which occurred at the end. 

Our method is to have our clients advertise at the beginning, or in the middle, of the rehab. This does not place the property into service (since you still have to meet the “ready”) criteria, but it does provide us with flexibility to square off against the IRS on treatment of costs.

Setting up an LLC will not affect the places in service date and is a completely separate conversation. If you are going to set up an LLC, I would recommend doing it before you purchase property at all. This will help you avoid problems such as Due on Sale clauses and transfer taxes.

@Daria B. when I ask new clients why they've switched CPAs, this almost always comes up. "I'm sent a 50 pg organizer which I fill out and then feel like I've done all the work."

This year we're sending a 1 to 2 page organizer depending on the type of client. 

In my opinion, organizers are necessary to make sure that the following information is captured:

• Address, birth date, dependents, and health insurance
• Information subject to change (i.e. address, rentals, business ownership)
• Entities that you own a stake in
• Entities that we need to be aware of for tax compliance purposes (i.e. are you needing your CPA to file a 1065 for your partnership? If yes, that's good info for us to have)

The organizer should generally ask certain questions that CPAs are required to ask, such as "do you have health care?"

But here's the funny part that many CPAs don't tell their clients. CPAs can print fillable organizers per client from their professional tax prep software. If you receive a 50 page organizer, that's exactly what is happening. The best part is that when the client fills out the organizer online or via computer, I can simply import the information into my tax prep software and BAM! I'm pretty much done with the return.

But that's lazy. And it's not very customizeable. Many CPAs swear by it, but then they eventually lose their clients because their client experience sucks. Clients don't want to thumb through a 50 page organizer. 

Ironically, with our 1-2 page organizer, our data collection process is much more intuitive and thorough than it ever was with the 50 page organizer. In fact, we now collect data all 12 months of the year rather than waiting for the client to provide everything in January and February. 

The end result is a seamless tax prep process and a WOW client experience. 

@Michael Plaks depending on the type of business, the age of the child, and the work performed, I do feel you can substantiate $10-12k wages.

Presence of the following factors will lead the IRS to conclude that payments to a child are not deductible:

• failing to pay employment taxes and file information returns for the child (where required)
• paying the child a flat amount determined at the beginning of the year that is not based on the services actually performed
• lack of correlation between the dates and amounts of payments and the hours allegedly worked by the child
• failing to maintain adequate records of the child’s hours worked and amounts earned, and
• compensating the child for services that are routine family chores.

In Eller v Commissioner 77 T.C. 934, the court allowed wages paid in 1974 to children ages 14, 13, and 9 in the amounts of $2,684, $2,616, and $1,868 respectively. In today’s dollars, that represents wages of $9,995, $9,742, and $6,956.

The court also disallowed portions of wages paid to the above children due to being unreasonable.

The above case is especially relevant to real estate investors as the taxpayers owned a mobile home park and their children were assisting them in it.

@Jerome Hranka you need an economic reason other than pure tax avoidance in order to substantiate a strategy. Because of this, many of the self rental strategies don’t work.

@Chris Martin the deduction is figured on your allocated profit, but the problem is that there is verbiage that indicates the deduction is figured on a business-by-business basis. 

So if one business nets $10k while the other loses $10k, it’s critically important to understand how the deduction works because we’re either getting a $2k deduction (on the business generating $10k in income) or a $0 deduction (if we aggregate).

@Michael Plaks that is an excellent question and one that I don’t yet have an answer to.

My gut says aggregated the rental activities. But what if you have an LLC generating rental income and active business income? Do you parse our the rental income?

@Llewelyn A. I wouldn’t say “counteracted” as @Michael Plaks pointed out that this won’t work for one property.

But yes once you no longer have depreciation to report, you’d then have net income which would qualify for the 20% deduction.

Keep in mind though that the deduction is for your aggregate net income/loss from your rentals. But it’s applied on a business-by-business basis for other businesses. At least that’s how I’m reading it.