All Forum Posts by: Jason Watson

Yup. Tax planning is a must... situational based tax planning. I am always surprised at how many taxpayers don't want to pay for tax planning so they can make informed decisions. Rather, and as Michael alluded to, they take a one-size fits all approach to these things. Reminds me of Dave Ramsey or that Profit First nonsense.

Also... Michael's #4 above is something so many people overlook. Costseg + bonus is a one-time shot from the tax gun. Having said that, we try to time it with unusually high income (like selling stock or getting big bonus or a big spike in biz income).

Totally agree. We do this analysis all the time... we find a nice "Estimator" for the costseg, and whack it against your 2024 tax plan to see how it all shakes out. But certainly a question for your tax pro.

Yeah this topic is certainly exhausted.

LLCs do not protect you from torts especially if you, the human, is careless or reckless in the direction of the LLC.

LLCs can be expensive. Maryland is not bad. California has a $800 minimum franchise tax per LLC per year (and it could be higher depending on gross receipts).

LLCs allow for orderly transfer of wealth upon death through an operating agreement. Like a trust.

LLCs do not open some magical door to more tax deductions.

I tend to recommend LLCs where the properties are located, but then those LLCs are owned by a Wyoming multi-member LLC.

But if you think that you can skip fixing that loose railing and hide behind an LLC when the tenant is injured, you'll regret it.

I prefer a 3115 all day long. But!

There are times where an amendment makes more sense... let's that year had particularly high income relative to other years. Whacking a bigger deduction against "one and done" high income makes sense.

Conversely, timing your 3115 need with a "one and done" high income year can be good strategy too. Holy crud! I made a zillion bucks on a bonus... time to fire up the cost seg on that STR.

Another consideration or variant is the 3115 big cost seg deduct paired up with a Roth conversion.

Gotta factor in descending bonus during 2023, 2024, etc. But the overall "matching strategy" can work well.

We suggest partnerships for rentals for 3 big reasons. Here is a snippet from our book-

First, the historical audit rate of partnerships (Form 1065) is 0.4%. Super low compared to individual tax returns (Form 1040). Why does this matter? When you have a big cost segregation depreciation plus your big startup expenses such as furniture and supplies, and you then have a big tax deduction against your big W-2 income because your passive losses are no longer limited with your big material participation, it increases your audit risk a ton. Putting all this action into a partnership tax return reduces the risk right back down to an acceptable amount.

Second, with a partnership tax return, we can mechanically show your capital contribution (at-risk money) including recourse loan debt. Why does this matter? Let’s say you invest $250,000 into a new business, and that business loses money. The IRS sees your “partner basis,” the $250,000, and suddenly the $100,000 first-year loss doesn’t seem so out-of-whack. Conversely, rental property activities reported on Schedule E of your 1040 tax return do not present the same way.

Third, all rental activities, including short-term rental (STR) activities, within a partnership tax return are reported on Form 8825. This is another layer of cloaking within the 1065 tax return and allows your rental income and deductions to fly just a little closer to the ground as compared to Schedule E page 1 of your 1040 tax return. There are three degrees of separation… the 1040 to the K-1 to the 1065 to the 8825.

Downsides include the additional tax return preparation fees and perhaps unnecessary state taxes such as California's franchise tax and LLC fee which can be summarized as money-grabs or pleasure to do business in our state fees. You need to consider your exposure versus the cost of reducing your exposure and therefore subsequent risk.

Theoretically, Yes. Keep in mind that a valid 1031 exchange relies on business to business "mindset." So, I would keep your 2-year plan to yourself. In 2 years, sure, have a change of heart. But it should not be "the plan" at the time of exchange.

Totally agree with Benjamin and Arn. Time kills all deals.

From my limited political understanding, the House included 100% bonus in a bill from February but it is stuck in the Senate.

Shocker... a tax pro not getting all the information on the first or second go-around.

I agree with all these posts. Generally for fix and flip, we put this activity into an LLC that might be taxed as an S Corp depending on profitability.

Rentals are usually put into separate LLCs depending on the state. Since LLCs don't do much (perhaps some wealth transfer within the OA or rules of the road with multiple members), they might not be worth it in high-fee states such as CA, MA and others. But if LLCs are cheap, like in CO, then we have a holding company own a gaggle of LLCs where each rental is owned by an LLC.

The fix and flip is kept completely separate... like way way away from the rental activities.

Don't put your rentals into your fix and flip LLC either. In other words, rentals generally don't go into entities that are or might be taxed as an S Corp.