All Forum Posts by: Jason Malabute

When it comes to being a real estate professional, it actually doesn’t have anything to do with your job title or profession. For tax purposes, it’s about whether you pass the 750-hour rule, the 50% rule, and meet the material participation requirements. If you qualify, you can use passive losses, like those from depreciation, to offset your active income. That’s the key benefit.

As for the cost segregation study, whether or not it makes sense really depends on your tax situation. The main reason to do a cost seg study is to generate bonus depreciation, which creates passive losses. If you don’t qualify as a real estate professional or don’t have a way to use those passive losses to offset your active income, then spending the money on the study might not be worth it. That’s something you’d want to figure out through tax planning.

Regarding the 1031 exchange, bonus depreciation doesn’t affect whether you qualify for one. But here’s something to keep in mind: when you sell a property, you usually have to deal with depreciation recapture, which is another type of tax. If you do a 1031 exchange, you can defer both the capital gains tax and the depreciation recapture, which is a nice benefit.

Thank you for sharing this important update about the Corporate Transparency Act and its BOI filing requirements. However, as Michael Plaks pointed out, based on the most recent federal court order referenced on the official FinCEN website, reporting companies are currently not required to file beneficial ownership information with FinCEN at this time. This means there is no liability for failure to file while the order is in effect.

As long as you paid a contractor or someone who’s not an employee $600 or more in a tax year, you are required to issue them a Form 1099, regardless of whether you paid them via cash, check, or another method. The key factor is the amount paid and the nature of the payment, not the payment method.

Like what Joshua said, purchase price, closing cost, and agent fees are capitalized. Normally seller pays buyer agent fees

Hi Rene,

It's great that you're planning to level up your bookkeeping! It's super important to work with a bookkeeper who has experience with real estate investing, especially if you're doing BRRRR. There are a lot of moving pieces with that strategy, so having someone who understands how to properly track expenses, capital improvements, and refinances is key. Proper bookkeeping now will save you so many headaches during tax season and as you expand your portfolio.

Best of luck as you grow your real estate business!

Cheers,

Jason

Hi Andres,

Congrats on your first real estate investment! That’s a big milestone. When you’re looking for a CPA, I’d suggest focusing on someone who really knows real estate. Try to find someone who already works with real estate investors—ask how many of their clients are in real estate to get an idea of their experience.

Check their Google reviews and ask for references to hear about others’ experiences. It’s also smart to interview a few CPAs to see who you feel most comfortable with. A good working relationship matters just as much as their expertise.

A couple of great questions to ask during those interviews are:

• Do they know about the $25,000 passive loss allowance and how it applies to real estate investors?

• Can they explain the qualifications to become a real estate professional and the benefits of that status?

Those are key topics to test their competence and see if they really understand real estate tax strategies.

Also, hitting up local real estate meetups is a great way to ask other investors who they use for their taxes. Ideally, you’ll find someone with years of experience, and if they’re a real estate investor themselves, even better—they’ll truly get what you’re trying to achieve.

Hope that helps, and best of luck with your property!

Cheers,

Jason

Hi Justin,

Before committing to investing in a cost segregation study, I would recommend doing a year-end tax planning session to evaluate whether cost segregation and bonus depreciation would actually benefit your specific situation this year. While these strategies can be powerful, they aren’t always the right fit depending on your current income, tax liability, and other factors.

I’d hate for you to spend significant money on a study only to find that bonus depreciation doesn’t provide the expected tax benefits this year. A tax planning session can provide clarity and help you make the best decision moving forward.

Hey Rick,

Great questions! Start-up expenses like the ones you mentioned can’t be fully deducted in the year they’re incurred. Instead, they’re amortized over 15 years (180 months). That said, inspection fees for deals that didn’t work out and mileage from property viewings before actually purchasing a rental property aren’t considered start-up costs. Unfortunately, those are treated as personal expenses and aren’t deductible.

As for the repairs and improvements, fixing leaky pipes counts as a repair and can be fully expensed in the current year. Replacing countertops, though, is a capital improvement and usually has to be capitalized and depreciated over time. There’s a silver lining, though—if the cost of the improvement is under $2,500, you might be able to expense it under the IRS’s safe harbor rule.

If you close by December 2024, you’ll be eligible to take bonus depreciation on your 2024 taxes, but it’s capped at 60%. In 2025, it drops to 40%. Regarding your second question, are you asking if those activities help meet the IRS material participation tests or qualify you as a real estate professional?

Hi Scott,

Yes, I’ve definitely seen tax planning services priced in that range. However, if you feel you don’t need a tax plan that complex, there are tax planners who specialize in working with real estate investors and can help you craft a tailored plan that’s more affordable. It might be worth exploring those options, especially if you’re just starting out.