All Forum Posts by: Kory Reynolds

To expand on what @Michael Plaks stated - yes you most likely can do a 1031, the next question is you should be asking if you should do a 1031.

It isn't free to do a 1031 - you don't want to spend $2k in fees to have a temporary deferral of what would have been $4k of tax.  I have had more than a few situations lately where a client was gung ho about some creative 1031 related transactions (drop and swap, construction exchanges).... until we brought up how much the legal /exchange / related accounting fees could add up to.  Sometimes it is just easier to pay the tax and move on.

Agreed with @Basit Siddiqi.  

The answer will be "it depends" - I could certainly see a scenario where it would be deductible.  And it won't have any bearing on what your entity structure is - it will be entirely dependent on the facts and circumstances of your real estate business.

Generally there is no immediate tax implication to doing this.  There can be specific issues that can cause the distribution to be taxable related to partners having enough basis / debt basis to distribute the proceeds.  If one partner unconditionally guarantees the debt, this can sometimes require some side room guarantees to that partner to ensure no one recognizes a capital gain.

As a few others have alluded to, there is a secondary problem known as a "debt financed distribution interest expense."  What this stems from is that the IRS requires that a taxpayer trace interest expense to the nature of how the proceeds are used.  What does this mean?  Say you had a $1m loan.  You refi to a $1.5m loan.  You distribute $500k to the partners.  The partnership is now paying interest expense on a $1.5m loan.  Say the partners took this $500k and each bought themselves a personal boat.  In a very simplified example, 33.33% of the interest expense on this loan ($500k distributed / $1.5m loan balance) is now attached to the boat(s).  Since the boat is personal, that interest expense is personal, and is no longer deductible - for each year and forever more.  Say that $500k is invested in a new trade or business - now it is business interest expense.  Say it is invested in a stock portfolio - now it is investment interest expense.  Each has their own tax implications.

There are some alternative methods of calculating how much of the distribution and therefore the interest expense falls under this category, but the bottom line is that it is very important to keep track of.  It also requires different reporting of that separate interest expense on the K-1 each year so the partners know they have the obligation of tracing that interest expense to however the partner used the distributed proceeds.

I typed all this up and realized Mr Brooks has left the building and posted this 6 months ago, but hopefully someone else will find this useful!

See two below if you want to work with someone relatively local  - the firm I am with is based in Portland, Maine and I have had a few colleagues who have gone to the below firms while pursuing a smaller firm environment which have a small business focus, very good reputations, and are on the Maine seacoast.  

Albin, Randall & Bennet (Portland)

One River CPAs (Bath)

If you are open to working remotely, take a look at those on the Bigger Pockets here.  Maine has a few local issues like the Capital Investment Credit, but out of that it is pretty vanilla and most on here could assist you without a problem.

$1,000 is more than in line for tax prep.  Turbo Tax for a full service paid advisor now is something like $1,500 if you pay full price, and that is with you getting some random preparer that you won't get the same one each year, won't be available throughout the year, and isn't going to take the time to strategize and help it get done.  I can say with certainty a firm like mine couldn't touch a $1,000 fee on any scope of work, we would be several multiples of that to sign up a new client.  

Turbo Tax works well in simple situations.  Very simple situations.  The number of missed deductions or incorrectly deducted items on Turbo Tax returns far outweighs the number of times I've seen 100% Turbo Tax returns that includes rentals.  My favorite is where they used TurboTax and missed PFIC foreign disclosures on their hedge fund K-1s, about 50 such disclosures completely missed year after year.

@Michael Plaks post is spot on - it isn't a payment for a return on investment, is a payment so you don't have to do it yourself, you know it is done right, and you are working with someone who can help you report in the most advantageous manner.

 An edit to myself here - ignore my comments regarding personal property 1245/1250 - I was just letting my fingers lead the way on the post and realized later I had errors in that statement.  There is still a required analysis on what may or may not be rolled into the 1031, especially when a cost segregation study is done and you have that analysis, but it most definitely does not automatically pull in all your 5 & 7 year property.

@Andrew Angell To this point - there may be cases where you have perceived inconsistencies, but it may just be your interpretation or different language being used to describe that situation.  To Michael's point, I did use the incorrect language in my post - I should have been discussing Passive vs Nonpassive, rather than using the word "active" as a replacement for nonpassive.

I'm not sure what I said you can do that is in contradiction to what Michael commented, but I believe we both described the baseline in a similar manner, and Michael by using the more accurate language.  He did expand further upon it another scenario that could apply that I did not discuss, but was not contradictory to my statement - if your lending is a trade or business (not portfolio), but is also passive, syndication losses could offset it.

In short...Michael is much better at being concise than I am, but I don't find anything that I would disagree with in his post (or any other post that he makes) - I find he is typically spot on.

 This is the exact same approach we are taking - information has gone out a few times in our newsletters over the last year and a half, with more details available upon request, along with FYIs to clients at year end or other regular meetings.  Doing our best to not let our clients get caught with their pants down while still being clear that we won't be taking care of it.  There was an interesting journal of accountancy article on this recently discussing the potential liability for CPA firms.  

To add some quick thoughts given we have me saying "NY isn't so bad", followed by @Basit Siddiqi stating they are some of the most complex - I should add the caveat that I was talking purely from a normal rental property / outside of NYC / relatively boring taxpayer perspective.  As soon as you get into tax credits, any of the local taxes / sales taxes / excise taxes / corporate taxes / some of the special deductions out there / withholding requirements / apportionment & allocation if you have operations across multiple states.... it does make me happy we have a State and Local Tax team at our firm to help delve into these other variables when they pop up.

I think people are making a bigger deal out of it than it is. You already register with the state when you form your LLC, with some states already disclosing who the owners in a partnership are. You already register with the IRS when you get an EIN, or have payroll, etc. You are already disclosing on an annual basis to the IRS what LLCs or other entities you own. It's just one more government body asking for a lot the same information.

There are a high number of CPA firms that do not want to get involved outside of the FYI to their clients, and some state boards are saying that a CPA advising related to this registration is an "unlicensed practice of law" given it is not under Title 26 - income taxes - the only place where CPAs and EAs are specifically authorized to interpret law.  I can also see where the CPA firms don't want to do this given for the CPAs...this is likely a one time large catch up project, and then never again.  So a lot of investment, resources, and time, for a very little value add project when our resources are already constrained, that has nothing to do with taxes or accounting, and then in the future the attorneys will be doing the work whenever a new entity is set up or there is a change of ownership.