All Forum Posts by: Rohullah Sharifi

Cost segregation and accelerated depreciation strategies can significantly enhance near-term cash flow by front-loading depreciation deductions. However, these benefits are subject to depreciation recapture upon the sale of the asset. When a property is sold, the previously claimed accelerated depreciation may trigger recapture tax, which is taxed at higher ordinary income rates rather than the more favorable capital gains rate. This recapture effectively reduces the property's adjusted basis, increasing the taxable gain on sale.

Proper planning and tax strategy are essential to balance the upfront benefits with the potential tax implications at disposition.

you can use simple excel to same cost. or may use paid software. 

Tax Professional can serve your interest better through experience, knowledge and practice in the field. Would recommend professional service, cost some money, but worth it.

 no actively participate, main source of income, no w2 job, then, the income is active income and mostly get 1099, which is qualify for the SE taxes. 

• The IRS taxes a Roth conversion as ordinary income in the year of the conversion.

• Your “tax bracket” for the conversion is not based on last year’s income. It is calculated based on your total taxable income in the same calendar year the conversion occurs.

So if you convert in 2025, the IRS will look at all your 2025 income (W-2, self-employment/LLC income, rental income, interest/dividends, etc.) to determine your tax bracket and how much tax you owe on the conversion.

Bottom line:

• The IRS uses your current tax year’s total taxable income (2025, in your case) to determine the tax on a Roth conversion.

• Your unemployment at the time of conversion doesn’t matter—the entire year’s W-2 + business + rental income is included.

• The Solo 401(k) conversion is taxed against your total taxable income, not just the income of the LLC that created it.

If you are actively engaged in the real estate business—such as rental property ownership, real estate investment, and property management—and you meet the material participation test, your activities may qualify you as a real estate professional for tax purposes. In this situation, where there is no W-2 job or other earned income, the net income from real estate operations could be treated as subject to self-employment tax (FICA).

It is therefore essential to maintain accurate and detailed records documenting your level of participation, income, expenses, and management activities. Proper recordkeeping not only supports compliance with IRS requirements but also strengthens your position in the event of an audit.

Since you are classified as an active constructor, your situation differs from that of a real estate professional or a licensed realtor. Short-term rentals (STR) can be a valuable strategy, but they require strict compliance with IRS standards.

It is essential that you:

• Maintain contemporaneous logs of hours spent on management, operations, and decision-making.

• Document material participation (e.g., booking management, repairs, advertising, tenant communication), as the IRS may closely scrutinize these claims.

• Keep supporting evidence such as receipts, invoices, emails, or calendars, which can strengthen your position.

• Differentiate personal use vs. rental use of the property to avoid reclassification issues.

• Understand potential recharacterization risks—without proper substantiation, the IRS could reclassify your STR income as passive, resulting in additional taxes, penalties, and accrued interest.

• Review annually with a tax advisor/EA to ensure your activities align with current regulations and to optimize deductions (e.g., depreciation, repairs vs. improvements, start-up costs).

Failure to follow these requirements can significantly weaken your position in case of an audit. With accurate records and ongoing professional guidance, however, you can maximize the tax benefits while minimizing compliance risk.

Forming an LLC can offer significant benefits, including access to valuable tax deductions. However, the extent of these deductions largely depends on how the LLC is taxed—whether as a sole proprietorship (reported on Schedule C), a partnership, or an S corporation. Generally, electing to be taxed as a partnership or an S corporation can provide a broader range of deductible expenses and potential tax planning opportunities.

Your activities qualify under the material participation test; however, it is essential that you maintain proper documentation of your hours to substantiate this status. If your spouse also participates, it further strengthens the position. By meeting the material participation requirements, your income shifts from passive to non-passive, which may provide more favorable tax treatment.

Additionally, you may consider adding a short-term rental (STR) to your portfolio. When paired with a cost segregation study on a property you intend to hold long term, this strategy can significantly accelerate depreciation deductions and enhance your overall tax benefits.

You can pursue both long-term rentals (LTRs) and short-term rentals (STRs) as investment strategies. If one spouse materially participates in the rental activity, it may qualify as non-passive income, thereby allowing losses to offset other active income—this is particularly beneficial for high-income taxpayers.

For short-term rentals, leveraging cost segregation can accelerate depreciation and generate significant tax benefits. However, this strategy is most effective when the property is held long-term, as selling too soon can trigger depreciation recapture, which may significantly reduce the net tax benefit.

Effective planning around material participation, cost segregation, proper bookkeeping & logs and holding period is key to maximizing tax efficiency in rental real estate.