All Forum Posts by: Bill Walston

And why do you think I have so many picutures of my lab Sandi wearing a sign that says "My Human Buys Houses"?? Love writing off those vet bills...kidding ;)

Truth be told, there are cases where the writing off of such expenses has been allowed. It just depends on the situation. You shouldn't be asking your tax pro can I deduct this, but rather how can I deduct this expense?

Mike, if I remember correctly, you said that you already have teants in the property, correct? If so, then your property is already in service. So, you must look at each individual expenditure at to whether it is a repair or improvement.

If you are only replacing the windows of a single unit (or even a few units) and are using the same type/quality of windows that are currently in place I would say you are only doing repairs to your property. You are bringing/keeping it in good operating condition. I would still hold this opinion even if you are painting the entire unit and replacing the windows of that unit.
If, though, when you say "updating" you mean that you are gutting the interior of the unit, putting in new cabinets, new counter-tops etc, then I agree that you have a renovation/improvement project and the windows would be capitalized as a part of that project.

In my opinion, for what it's worth, replacing a broken window with the same kind/quality window would be a repair. In this case you are simply keeping your property "in good operating condition." It will not materially add to the value of your property.

On the other hand...
If you replace your now broken, regular ol' windows, with new storm windows, you have an improvement. You are adding to the value of, or bettering, your property.

A fine line, to be sure.

Just my .02

I agree Rick. I think your accountant is making the all too common mistake of confusing tax status with legal status. You are NOT your LLC. Your LLC is a legal entity which exists under, and is governed by, the laws of your state. Accordingly, your property management company and all of your property owning SMLLC's are separate, legal entities and can contract with whomever their members wish. Your tax status is a different story...

It sounds as though all of your LLC's are single member and will be disregarded for tax purposes, so the income and expenses will flow to your personal return and you may not realize a tax benefit from the arrangement between your own LLC's. That being said, I think you have an excellent idea...one that I've recommended many times. Might I suggest that you consider having your property management LLC elect an S-Corp status?

The reason for the suggestion is that property management is considered an active trade or business. The profits, if any, would be subject to self-employment tax, and you want to prevent that, if possible. All things being equal, I find that an LLC generating active income fares better tax-wise with an S-Corp election. You should, of course, run this by your tax pro as he/she is better aware of your individual tax situation.

You ARE looking for a good real estate savvy tax pro, right? :-)

I've been having problems with BP posts this afternoon as well. That, and the "preview" function doesn't seem to work..I had chalked it up to internet problems..

But I digress :)

While I cannot/ do not speak for the IRS, I can say that the Section 179 expense is offered as an incentive for small business owners to grow their businesses with the purchase of new equipment. It has been a part of most of the last several small business stimulus packages. That, unfortunately, does not include our (passive) rental activities.

The 179 deduction is only allowed for qualified Section 179 property. This is property that you acquire by purchase for use in the active conduct of your trade or business.

The IRS specifically excludes property used in a passive activity, which includes our rental property. It's not just us real estate investors, but any investing activity would not be eligible for Section 179 unless it is also classified as an active trade or business.

The age old question of capital expenditure vs. repair and maintenance ... and it IS sometimes a very grey area.

First, don't make the mistake of letting dollar signs be the deciding factor when trying to make the determination between the two. YOu can spend a few hunded bucks on a capital expenditure and thousands of bucks on a repair/maintenance. The classification is based on the facts and circumstances of the nature of the expenditure.

According to IRS PUB 527:

And continues with

As you noted, even items that would usually be treated as repairs and maintenance are treated as an improvement if incurred while "getting the property ready for use." That being said, I don't think that is the case in this situation. It sounds as though the property is already in use as a rental property. Your expenditures will be classifed as either R&M or a capital improvement. You just need to determine which, based on the above. Those "definiations" apply whether the work is done "piece-meal" or all at once.

By the way, if you replace the refrigerator, the expenditure is a capital expenditure, whether or not the unit is occupied at the time. You're putting in a 'new" asset. If, on the other hand, you simply replace parts on the existing refrigerator it would be a R&M.

Frustrating, huh? :)

Don't ya just love a good debate??

The active management of your investment properties does not change the nature of your activity from passive to trade or business. As you stated in your post, you are limited to the $25K passive loss limitation, and NO Forms 1099 are required.

As Charles said, the law referred to in the JOA article was repealed by the signing of HR 4 (Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011) on April 14, 2011.

I've used MileBug on the iPhone and it works great. I'm pretty sure it's available for the 'Droid.

That's correct Chris. As long as your real estate activities are considered passive, and not a trade or business, you are not required to file Forms 1099. This is true irrespective of the number of rental properties you own. Forms 1099 are required only for payments of $600 or more to non-employee service providers in the course of your trade or business.