All Forum Posts by: Gregory Wilson

This depends on what level of control you can exercise over the W-2 employer. If its your own company or your father-in-law that gets one answer. If its General Electric it is another.

In Hamilton County Ohio, 4 out of 5 properties scheduled for foreclosure do not sell. Mostly, they are withdrawn by the lender (I can explain why); second there is a postponement for workout efforts, third they is an actual workout plan agreed, fourth, a bankruptcy filing.

If it is an auction, how do you know the price? And, if it is in foreclosure why wasn't it sold in the market? Two questions that preceded your inquiry.

Quote from @Melanie Baldridge:

Newton's law of tax:

What goes down must come up.

Everyone enjoys the sweet benefits of bonus depreciation, but what happens when you sell?

A post on recapture:

People are concerned about recapture when they cost segregate their improvements and for good reason.

Recapture is real, and those deferred taxes will need to be paid.

But fear not! If you think ahead, you can minimize recapture with the right tax planning.

So... What is recapture?

Basically, there's no free lunch when it comes to taxes.

Depreciating property lowers your tax basis. When you go to sell, you're subject to tax on the amount of profit between your adjusted basis and sale price, not your purchase vs sale price.

Recapture is NOT repaying the depreciation. It's a tax on the gain.

How is this calculated?

To set the scene: A cost seg study breaks your property into two important categories:

1250 "real" property aka the building, foundation and other long life assets.

&

1245 property aka anything that can be accelerated such as 5, 7, or 15 year property like carpets, cabinets, or other site improvements. This is most of the depreciation you are taking year one.

You can calculate your depreciation recapture by taking the sale price of the asset and subtracting the adjusted cost basis.

The adjusted cost basis is what you paid for the asset plus any improvements you made along the way minus the depreciation you took along the way.

The profit above this original cost is taxed as a capital gain, but the part linked to depreciation is taxed at a maximum rate of 25% under the unrecaptured gains of section 1250.

To recap the tax rates are:

- Sec. 1250 real property: 25%

- Sec. 1245 property and 15 year 1250 property: Ordinary Tax Rates

There are ways to minimize depreciation recapture especially if you know how to work smart with your CPA.

1) Asset Valuation at Time of Sale - Sellers can minimize recapture by reallocating the price of the assets on sale. Your old carpet did not become more valuable over the seven years you owned the property, even if you are selling for a gain. Work with your CPA to allocate more value to land and structure. For larger properties, some of our clients run another cost segregation study at the time of sale.

2) Partial Dispositions - Taxpayers can carve out and dispose of components removed or demolished from a building. By making partial dispositions, you can also avoid subsequent recapture on these items when you go to sell. Note this election MUST be made in the year of the dispositions.

2) 1031 - There's usually no tax on gains or losses when swapping property for similar property. However, even in an equal exchange, recapture tax might apply. But, if a cost-seg study is done on the old property, you can manage Sec. 1245 recapture tax by doing a study on the new property to confirm it has as much or more Sec. 1245 property.

You cannot swap a fully depreciated gas station for a raw piece of land and avoid recapture - you must replace all the 1245 and 1250 property.

3) OZ - Sure you can defer your capital gains for a few years into an OZ fund, but the magic of OZ investments is the ability to achieve tax-exempt growth after a 10-year holding period. Cost seg depreciation is not subject to recapture here! The compliance on these can be tricky, tread carefully or work with experienced funds.

4) Death - Nothing is certain but death and taxes. For RE owners, death allows you to pass assets to your heirs and step up in basis, effectively eliminating recapture. We generally advise our clients to go ahead and pay the recapture rates if death is the alternative.

The good news about recapture - the deductions are a deferred tax liability to you, and an interest free loan from the government. You will never pay more tax in recapture than what you originally deferred, assuming your personal tax rate stays the same. Borrow the money interest free and compound on

As always DYOR and talk with your CPA.

Melanie:  Yours is a good explanation. I think you might also want to mention the benefit of abandoning specific assets on the depreciation schedule with residual or undepreciated basis. Getting the deduction when abandoned or at the time of updating those asset classes and also getting the assets off the balance sheet to avoid future gain from sale price allocation.

This might be a good spot to dispel a myth.

Off topic, but it should be interesting to the accountants populating this thread.

In Ohio, there is essentially no such thing as piercing the corporate veil for a corporation or an LLC resulting from co-mingling, casual intercompany transactions, shareholder $$ back and forth, etc. Complete myth.

Here is the law:

“To fulfill the second prong of the Belvedere test for piercing the corporate veil, the plaintiff must demonstrate that the defendant shareholder exercised control over the corporation in such a manner as to commit fraud, an illegal act, or a similarly unlawful act. Dombroski v. WellPoint, Inc., 119 Ohio St.3d 506, 2008-Ohio-4827.” (Emphasis added)

Payment technologies like Venmo, bank EFT, Zelle, etc. have made a dog's breakfast out of good accounting and internal control.

For my part, I am "old school." I vouch every payment and account for it at the time of check writing. Don't care what vendors want. They send an invoice, I pay it with a check. Every check is a paper check with a invoice attached and the invoice number or the number the vendor uses as my account number on the check. If there is no invoice, I make one by printing out their email, text message or verbal statement onto paper and attach it to a check stub which are kept in number order. If I have to pay by EFT or Paypay, I print the transaction confirmation out as though it was an invoice and a check and file it in the order of where it would have been if a check had been written.

I never deposit any funds in my rental account unless they are rental income.

Please rethink reliance upon sin taxes. They really don't work, historically. Not a one that I can think of.

More importantly, they create a motive for government to promote the sin - in this case wider use of a powerful drug. Do we really want the government to rely on getting more people to smoke more marijuana in order to do their job protecting us and maintaining our infrastructure and schools?

And, consider the regressive nature of the tax. I have a lot of income and don't buy any marijuana or pay any marijuana tax. My landscape boys on hte other hand were smoking while cutting my grass probably at about $12/hr. Should they be paying my share of the tax?

I wish I had started at 19. Good job Julian. Start with the view from 30,000 feet up. Get a government pamphlet on investing. I'm sure the SBA or HUD has one. Learn every word you don't recognize like you were learning a foreign language. Once you know the big picture you can drill into stuff you are interested in.

Welcome and good luck.

You are right about psychology being at the center of my advice to you. I am very familiar with your approach and what are likely your deep seated reasons. And, if you don't want the best candidates for purchase but just want to exercise that authority you think you have by being the owner, that is up to you. But, if you presented this approach in any place devoted to helping you make sales, it would be flat out rejected. I can tell you why you cling to your approach but you will just be more offended. I think it should suffice to say this approach is not your friend.

Sorry. Cash balances that accumulate in checking from monthly rents usually receive $0 or very low interest. So, cash management is a function whereby the manager determines the cash not needed for the current operating cycle (week or month, daily in big companies) and puts the cash to work at better interest. Usually the best place is to reduce debt because that is the same as getting interest paid at the rate on the loan or credit. Usually the highest opportunity. But, the cash manager can't get the mortgage pay down back unless it is a credit line, credit card or Heloc, so there is then the option of higher interest paying cash accounts.

I'm not much for debt preferring cash funded investments, but most investors have tiers of debt that can be offset even if only for a week or month from credit lines, HELOCs, even credit card debt. I sweep cash to an interest bearing account which i right now about 4.5%. A person who has 26% credit card debt, a 8% HELOC or credit line can use even small amounts of excess cash to earn money.