All Forum Posts by: Account Closed

1. Franchise Tax in California:
   • California has an $800 minimum franchise tax that applies to LLCs, LPs, and LLPs. This tax is due annually, and it's important to be aware that owning property in California, even through an out-of-state LLC, could trigger this tax obligation.
2. Wyoming LLC as a Holding Company:
   • Using a Wyoming LLC as a holding company is a strategy often employed for privacy and liability protection. However, it's essential to ensure that the structure is set up correctly to comply with both Wyoming and California laws.
3. EIN for Wyoming LLC:
   • Obtaining an EIN (Employer Identification Number) for your Wyoming LLC is a common practice, even if it's not conducting business directly. An EIN is often required for banking and tax purposes. However, having an EIN for the Wyoming LLC doesn't necessarily mean it's doing business in California.
4. Franchise Tax on the Wyoming LLC:
   • The $800 California franchise tax is typically associated with entities conducting business in the state. If your Wyoming LLC is truly just a holding company and not conducting business activities in California, it may not be subject to the $800 franchise tax. However, the exact determination may depend on the specific circumstances and the interpretation of California tax laws.

1. Tax Perspective:
   • The tax implications of your arrangement could depend on various factors. Generally, if you rent out part of your property, you may be eligible for certain tax deductions related to the rental portion.
   • The IRS is primarily concerned with the amount of time the property is used for personal purposes versus rental purposes. If you use the property for personal use for more than 14 days or 10% of the total days it is rented (whichever is greater), it might be considered a personal residence.
2. Tax Classification:
   • The IRS does not have a specific category called "second home" for tax purposes. The classification often depends on how you use the property. If you use it personally and rent it out, it might be considered a "mixed-use" property.
   • The IRS typically distinguishes between a property used for personal use, a rental property, or a combination of both. The tax treatment could vary based on the percentage of time the property is used for personal use versus rental.
3. Advantages/Disadvantages:
   • Advantages of your current arrangement might include potential tax deductions related to the rental portion, such as property taxes, mortgage interest, and operating expenses.
   • Disadvantages might involve complexities in tracking expenses and income, and potential limitations on certain deductions if the property is not rented out for a significant portion of the year.
   • If you were to convert SFH2 into a full rental without personal use, you might qualify for certain tax benefits associated with rental properties, but you may lose some of the personal use benefits.

Transferring a property from your personal name to your LLC can have various legal and financial implications. Here are a few points to consider:

1. Using Your LLC for Property Management:
   • In many cases, you can continue managing the property under your LLC even if the deed hasn't been transferred. This is common during the renovation or transition phase. You can still use your LLC's funds for property-related expenses, and it's generally acceptable to conduct business activities in anticipation of the transfer.
2. Tax Implications:
   • The tax implications can vary depending on your jurisdiction and the structure of your LLC. In some cases, there may be tax consequences associated with the transfer of the property. Consult with a tax professional to understand the specific implications for your situation.
3. Insurance Coverage:
   • While you mentioned having good insurance coverage with an umbrella policy, it's essential to confirm with your insurance provider whether any changes to property ownership (such as transferring the deed to your LLC) would affect your coverage. You may need to update your insurance policy accordingly.
4. Legal and Lender Considerations:
   • Before making any decisions, it's crucial to review the terms of your mortgage, as transferring the property to an LLC could trigger a due-on-sale clause. Additionally, check local laws and regulations regarding property transfers and LLC ownership.

Firstly, self-dealing is a significant concern when it comes to transactions involving self-directed IRAs. The IRS prohibits certain transactions between the IRA and its owner (or certain related parties). Mixing personal funds and IRA funds in a way that directly benefits you could be considered self-dealing, which is prohibited.

That being said, partnering with your SDIRA in real estate investments is not necessarily off the table, but it requires careful structuring and adherence to the rules.

Your proposed scenarios might raise some concerns:

1. Liquidation of the LLC:
   • Transferring funds back to your personal account and the SDIRA equally after a sale could potentially be viewed as a direct benefit to you, which may be considered self-dealing.
   • Liquidating the LLC might be seen as a distribution of assets, and the IRS has strict rules about distributing assets from an IRA to its owner before the designated distribution age.
2. Keeping the Money in the LLC:
   • Continually using the same LLC without clear separation of personal and IRA funds might pose challenges.
   • Regular disbursements could also raise concerns unless they are conducted in a manner consistent with the IRA's purpose and not used for personal benefit.

A more common approach is to establish a separate LLC for the IRA to invest in. The LLC is owned by the IRA, and you act as the manager. This structure, often referred to as a checkbook IRA, gives you more control over the funds while still maintaining a clear separation between personal and IRA assets.

Tried reaching out to you. Pls send more info on DM.

A. Buy as an investment property:

• Pros:
  • Potential tax deductions for rental property expenses, such as mortgage interest, property taxes, maintenance, and depreciation.
  • Income generated from renting out the main house may help offset expenses.
• Cons:
  • You may need to report rental income, and depending on your rental income and expenses, there might be tax implications.
  • Depreciation deductions could impact your future capital gains tax when you sell the property.

B. Buy as a second/vacation home:

• Pros:
  • Mortgage interest may be deductible, up to certain limits.
  • The property could potentially qualify for the mortgage interest deduction as a second home.
  • Easier tax reporting compared to rental property.
• Cons:
  • Limited tax benefits compared to an investment property.
  • You may not be able to deduct operating expenses.

C. Other options to consider:

• Hybrid Use: You might also consider a hybrid use where you allocate a portion of the property for personal use and a portion for rental. The tax treatment would depend on the percentage of time and space used for each purpose.
• 1031 Exchange: If you are considering selling any of your current investment properties to fund this purchase, a 1031 exchange might be a strategy to defer capital gains taxes.
• Tax Credits: Investigate if there are any local or federal tax credits or incentives for certain types of property use, such as energy-efficient improvements.

In any case, documenting your personal use and rental use meticulously is crucial for tax purposes. The IRS has specific rules regarding the number of days a property is rented vs. used for personal purposes, and these rules can impact your ability to deduct certain expenses.

Seller financing can offer several benefits for both parties involved. Here are some potential tax advantages that you can highlight for the seller:

1. Capital Gains Tax Deferral: By spreading the payments over time through seller financing, the seller may be able to defer a portion of the capital gains tax that would be incurred in a lump-sum sale.
2. Income Tax Spread: Instead of receiving a large sum of money all at once, the seller will receive payments over time. This can potentially result in a lower tax rate on the income received, as it falls into different tax brackets.
3. Interest Income: If the seller charges interest on the financed amount, they can earn interest income over time. This interest income may be taxed at a potentially lower rate than capital gains.
4. Estate Planning Benefits: Depending on the seller's overall financial situation and estate planning goals, spreading out the receipt of funds can be advantageous for minimizing estate taxes.
5. Installment Sale Reporting: If the seller chooses the installment sale method for reporting the sale, they may be able to spread the recognition of the gain over the term of the financing, potentially reducing the impact of the capital gains tax.
6. Flexible Terms: Seller financing allows for flexibility in negotiating terms, potentially allowing the seller to structure the deal in a way that optimizes their tax situation.

Bonus depreciation is a tax incentive that allows businesses to deduct a significant percentage of the cost of qualifying property in the year it is placed in service. This includes commercial properties.

Real Estate Professional Status (REPS) is a designation that allows individuals involved in real estate to treat rental real estate activities as non-passive, which means they can use losses from these activities to offset other income, including W-2 earnings. Without REPS status, passive activity loss rules may limit your ability to deduct losses from rental activities against non-passive income.

Now, regarding your question about bonus depreciation derived from a cost segregation analysis being used to offset W-2 earnings without qualifying for REPS:

1. Commercial Property: The company providing the cost segregation analysis may be referring to the fact that bonus depreciation is generally available for commercial properties. Commercial properties often qualify for bonus depreciation, and you may be able to use it to offset income from those properties.
2. REPS Status: While REPS status is typically required to offset passive losses against non-passive income, it's not always a requirement for taking bonus depreciation. Bonus depreciation can be taken on qualifying property, including commercial properties, even if you don't meet the REPS criteria.
3. Tax Planning: It's essential to carefully plan your tax strategy with a professional. They can help you understand the specific rules and limitations that may apply to your situation. It's also crucial to ensure that you are correctly classifying your property for tax purposes.

In summary, it is possible to use bonus depreciation on commercial properties to offset income without REPS status, but the specific details depend on your individual circumstances and the tax laws in effect.

It's great that you're thinking about keeping track of your expenses for tax purposes. Here are some important things to keep in mind and track for your Airbnb and rental property:

1. Income and Expenses:
   • Keep a detailed record of all rental income received.
   • Track all expenses related to the property, including mortgage interest, property taxes, insurance, utilities, maintenance, repairs, and any other relevant costs.
2. Property-related Expenses:
   • Categorize your expenses to make it easier for your CPA. For example, separate expenses related to the Airbnb portion of your primary home from those related to the rental property.
   • Track expenses for furnishings, appliances, or other items specifically purchased for the rental property.
3. Travel and Transportation:
   • If you travel to manage your rental property or Airbnb, keep track of your mileage, accommodation expenses, and any other travel-related costs.
4. Home Office Deductions:
   • If you have a dedicated space in your home for managing your rental activities, you may be eligible for a home office deduction. Keep records of the square footage of the office space and related expenses.
5. Document Repairs and Improvements:
   • Distinguish between routine repairs and capital improvements. While repairs are deductible in the current year, improvements may need to be depreciated over time.
6. Depreciation:
   • Keep track of the cost basis of your property and any improvements for calculating depreciation.
7. Tenant-related Expenses:
   • Document any expenses related to finding and screening tenants.
8. Legal and Professional Fees:
   • Keep records of any legal or professional fees associated with managing the property.
9. Form 1099s:
   • Ensure that you collect and provide necessary tax documents, such as Form 1099-MISC, from Airbnb or any other platforms through which you receive rental income.
10. Bank Statements and Receipts:

• Maintain copies of bank statements and receipts for all transactions related to your rental property.

A simple spreadsheet can indeed be a helpful tool to organize this information. Just make sure it includes the necessary details for each expense, and keep all supporting documents and receipts in an organized manner. This will make it easier for your CPA to accurately calculate your write-offs and ensure compliance with tax regulations.

As a specialized real estate CPA serving investors nationwide, I'm here to provide expert guidance on your most complex tax matters, from navigating 1031 exchanges and cost segregation studies to optimizing your rental property deductions and handling multi-entity structures. Whether you're a seasoned real estate investor or just starting out, fire some questions at me and let me provide you with some insight that I'm hoping will be helpful to you in your investing journey.

Feel free to connect with me directly as well.

Thanks.

Kislay Shah CPA