All Forum Posts by: Eamonn McElroy

Some thoughts, not a book:

--RE pro is only necessary to rebut the baseline presumption that a rental real estate activity is passive (IRC Sec 469). STRs are generally not a rental real estate activity under IRC Sec 469 so discussing RE pro in the context of an STR is usually unnecessary. An STR is generally treated like any other non-rental business under the passive activity loss rules. Lots of good past posts on RE pro and/or STRs where these topics have been fully explored if you use the magnifying glass up top.

--The decision between Sch E and Sch C comes down to whether the income is subject to SE tax or not. That's really it the strong majority of the time. An STR does not belong on Sch C unless it provides substantial hotel-like services. Most Airbnbs do not provide substantial hotel-like services. Think maid service during the stay (not merely after the occupant vacates), breakfast on location, laundry services, shuttle services, etc.  Most Airbnbs belong on Sch E but are subject to a separate set of rules under the passive activity loss rules than a traditional long-term rental would be.

--It's not a good idea to report an STR on Sch C instead of Sch E if there are no substantial services, even if there is a loss, as that would generally improperly reduce income subject to SE tax and mess with your calculated eligible contribution to an SE retirement plan. This might lead to a sticky situation upon audit or examination, particularly if the three year statute has lapsed but the six year has not.

--Do not consider tax advice from certain sources online, particularly the ones that imply they can handle your taxes and handle Dracula.

There are several differences and also an area of opportunity.

Your best bet if you want someone local...below the gnat line...is to ask for referrals within your network or join a local RE association and ask for referrals.

If you aren't opposed to working remotely, there are at least a dozen tax practitioners who are active (or semi-active) on this subforum. My best advice is to search historic STR posts, jot down names of those you feel can provide value, and reach out.

Best of luck.

As far as options, from a bird's eye view:

1) Loan the proceeds from the S Corp to a new entity at fair-market interest.  Offer and execute personal guaranties on the debt from the shareholders of the S Corp to the lender to alleviate lender concerns.  This will probably be the path of least resistance.

2) Pay off the debt.  Immediately turn around and take out a new loan to a new entity, and use the S Corp shareholder's interest in the S Corp as collateral.  This may be harder to get the bank/lender to agree to but is cleaner and less administratively burdensome.

Distributing out the proceeds might have more than one landmine, and I don't like that option based on the limited information seen.  It's not a good idea to do that without consulting with the tax advisor to the S Corp and making sure the distribution for each partner has been examined and greenlit as low-to-no chance of tax consequences in the short-term.  Beyond the short-term no one really knows.

There's a lot of noise in this thread, hopefully this will help clarify...

First, when we're talking about contributions to a Solo 401(k), we need earned income.  Earned income is W-2 compensation to an employee or income that is subject to self-employment taxes.  We're not talking about passive or non-passive income.  That doesn't come into the picture when we deal with retirement contributions or eligibility and using those terms just muddies the waters.

Second, how this can be structured depends on how the rentals are held. If the rentals are wholly-owned and held directly, or held through a disregarded entity ("DRE"), or held as a fractional direct interest as a TIC, they're probably reported on your Schedule E. In this situation you can't just form a sole prop or DRE property management company with the goal of reporting the management fees extracted from the rentals on Schedule C. This is you are the reporting taxpayer on both ends of the transactions. What happens here is that transactions between the "businesses" are disregarded for federal income tax purposes. We cannot recategorize income.

Management fees between a Sch E and a Sch C are not going to work.  The risk is high that they will be recategorized by the IRS upon audit or examination, which means that you've overcontributed to a retirement plan.  That is not a good spot to be in.

Third, we have to make sure the juice is worth the squeeze.  An arms-length management fee is around 10% of gross rents.  If you are just starting out and/or have less than $100k of gross rents, this strategy shouldn't even be considered IMO.  It's good to bring up, but a good CPA is going to concisely explain why, after the additional costs...administrative overhead, additional filing fees, employment or SE taxes, etc you'll most likely find the cost-benefit is negative.  It does have its place, but that is more geared toward a discussion with a tax professional.

If you want to use an entity and an EIN as responsible party I believe you must mail or fax in a Form SS-4.  You cannot use the online tool.  (I believe)

While it's technically correct that the tax ID of a disregarded entity is that of the first regarded entity parent (i.e. an SSN in the case of an individual), many banks will require an EIN to open an account titled in the name of an LLC. So much so that "banking purposes" is one of the reasons one can give for applying for and obtaining an EIN for a SMLLC that otherwise does not need an EIN.

Furthermore, it is strongly advise to apply for and obtain an EIN and to use that EIN when opening accounts titled in the name of the LLC, and not the SSN of the individual owner. If the LLC later adds members and becomes a partnership, or makes an S or C election, the tax ID associated with the account must be changed from an SSN to the LLC's EIN. Or worse, the account must be closed and a new account opened. This is very disruptive to any business.

It is a no-brainer to obtain an EIN for the SMLLC and use it when opening accounts.  IRS computers tie the EIN to the individual owner's SSN while it is disregarded so there are no reporting errors.

Thank you for the mention @Ashish Acharya.

There are some misconceptions and knowledge gaps above. The most important knowledge gap is that under UK tax law US LLCs are treated as corporations regardless of how they're treated for US federal income tax purposes. This isn't an uncommon theme. This disparity in treatment can lead to misalignment of tax credit generation and utilization, or worse...lost tax credits. There are curative planning opportunities in this area, the most basic of which is for a non-resident alien (as it relates to the US) to hold their interest in US real estate through a US LLC that has made the election to be taxed as a C Corp.

Investing across international borders creates regulatory and tax compliance obligations that should one should not attempt to DIY.  It is not for the faint of heart.  Investing across international borders is expensive, as are the advisors in this area that know their salt.

Best of luck.

@jason chase

What your lender is asking for is what we commonly call a "comfort letter".

It is a checkbox on their list, and will be scrutinized with the attempt to shift liability to the accounting firm that wrote it should the loan go south and the lender cannot collect from the lendee.

The AICPA as well as errors & omissions insurers strongly discourage tax and accounting firms from writing these letters. The GNMA and FNMA also actively discourage the practice and have issued written guidance stating that lenders should not be requesting comfort letters from accounting firms.

Unfortunately some lenders continue to do it as they want the assurance of an audit but do not want to pay for it.  Furthermore, a tax CPA providing any level of assurance would be a violation of AICPA professional standards.  They are risking their license and risking sanction by their state board.

Most reputable CPA firms are not going to write any kind of letter for a non-client, which I believe is your situation.  The risk just isn't worth any fee.

For long-time, existing clients who need something for the lender, most firms have a boilerplate template that clearly states the scope of the services that they provide to the client, that they have not audited or examined the financials and provide no assurance, and that it is the lender's responsibility to perform due diligence, etc.

@Nicholas Aiola is located in the NYC metro.  He's worth an interview call.

As @Christian Stoecklein mentioned, a large W-2 for a single filer (or both spouses if MFJ) is sure to trigger an audit or examination eventually if RE pro is also claimed.

If you're a RE pro, consider working with a tax pro who specializes in this area to make sure you're substantiating your tax return positions every year.