All Forum Posts by: Jason Watson

Michael is spot on. Here is California's very self-serving explanation-

Doing Business in California

Example 1

Paul is a California resident and a member of a Nevada LLC. The Nevada LLC owns property in Nevada. The LLC hires a Nevada management company to collect rents and provide maintenance. Paul has the right to hire and fire the management company. He occasionally has telephone discussions from California with the management company in Nevada regarding the property. He is ultimately responsible for the property and oversees the management company. Paul conducts business in California on behalf of the LLC. The LLC must file Form 568.

Example 2

Rachel is a California resident and member of an Oregon LLC. The Oregon LLC has a retail store in Oregon. Rachel uses a California address for the LLC's tax filings and a California accountant to prepare the LLC's tax returns. Rachel conducts business in California on behalf of the LLC. The LLC must file Form 568.

Example 3

Sara is a California resident and a member of a Texas LLC. The Texas LLC receives royalties from Texas oil wells. Sara maintains a California business bank account and secures financing in California for the LLC's Texas investments. Sara conducts business in California on behalf of the LLC. The LLC must file Form 568.

Let's not forget the avoidance of net investment income tax with REP status as well. Sure, most people want to leverage deducting passive losses... but one day you might have net profit that could be whacked with a 3.8% NIIT.

And the "kidding everyone... just having some Wednesday fun" wasn't enough? Um, ok.

You are getting into a lot of what-if's and "it depends." Talk to a qualified tax pro... you might be heading for trouble otherwise.

Are your in-laws contractors? Or are they going to be helping out here and there?

Certainly paying them a wage or fee reduces your rental income... but then they have to recognize that income (perhaps at a lower tax rate?).

What specifically will they be doing? What do they do now? Are they expecting to pick up an income tax liability from your payments?

Sure but you need to spend more time on real estate activities than other activities (business or W-2 job). So, 2,080.1 hours on real estate is certainly tough if you work a 9-5 day job. As copied and pasted from above-

(1) more than one-half of the personal services the taxpayer performs in
trades or businesses during the tax year are in real property trades or
businesses in which the taxpayer materially participates

That's how I understand the W-2 problem... it is hard to say you spend more time on real estate than any other activity if you work 2,080 hours.

Another consideration is how much you rely on the W-2 income for lifestyle versus rental income. If you make $150,000 as a W-2 and you have one rental that grosses $30,000, it'll just add fuel to the IRS fire.

Communication is certainly key. It is the number 1 complaint when our firm takes on a new client. We usually ask the prospect two related questions- how do you prefer to be communicated with (email, text, phone call), and what is your definition of timely?

A prospect who wants same-day phone calls is not a good fit. When is the last time you got a hold of your doctor or attorney  on the first go-around? Unlikely, and tax professionals operate in the same vein. Our firm only checks emails on Mondays and Thursdays, but our clients know that and also know they can call us anytime. In other words, don't fight your house fire with email.

So... it is all about managing expectations and then making good on the promises.

We find that scheduling meetings solves about 99% of the issues... but it takes two to tango. The client needs to be attentive, and meet the tax pro half-way on availability and willingness to communicate.

Also, there are no accounting emergencies. Only poor planning.

Generally... cost seg and the resulting accelerated depreciation and likely loss benefits you in 3 scenarios-

1. You have a qualified STR and your losses are not limited,

2. You have other net rental income (profit) in other activities / rentals (cannot be self-rentals typically) that you can offset, and / or

3. You qualify as a Real Estate Professional (REP).

Keep in mind that the big play is accelerated depreciation to lower your tax burden which in turn increases your cash flow for that year. However, it will likely lower future cash flow so it is a time-value of money play (and perhaps income tax bracket matching... ie, big deduction during a one-off big income year).

Two properties... one with cost seg and one with out will have the same depreciation taken at the end of its life (27.5 or 39.0 years).

Also keep in mind that STR usually requires 39.0 years of depreciation for the primary building asset. Then again I see so many people STRing in year 1 just to convert to LTR in year 3 once the big cost seg is done and in the bag.

Michael is right...

Too many people are giving advice here without asking the basic question- how many hours do you work for your W-2? 2,080? 1,500? 750?

Sure... with a W-2 it can easily be challenged. It is right in the Audit Techniques Guide (ATG). "Hey W-2 person, call me. Love, The Service." However, being audited or challenged is not the end of the world. The IRS loses cases... lots of them. Sure, they play pot odds and ensure they only take on good cases.

So... it depends on your W-2 hours spent... and your tolerance for pain (risk).

You can have new leases signed concurrently with the title transfer. Also, at times your leases might contain language allowing you assign the lease to others (an assignee).

Probably just easier to repaper the lease... but it opens up the lease to new or re-negotiated terms should your tenant want to be difficult.