All Forum Posts by: Kory Reynolds

Yes - you can split the gain based on the proceeds amount apportionable to the basis of the house completed prior to one year as long term, and the proceeds apportionable to the portion completed in the 12 months prior to sale as short term. It would theoretically be based on the value of these parts as of the date of the sale.  In example, one potential approach for a very simple scenario (this doesn't take account any land, how long of a period this was done over, etc), say you incurred $100k of construction costs prior to 12 months, and $200k in the last 12 months, then sell for $400k. $100k gain - $66k short term, $33 long term. The approach taken should take into account the facts and circumstances you have - I would need to revisit the rules to see if their is a specific prescribed method, but in court rulings on split basis/holding periods, typically a logical approach can prevail.

I'll disagree with the above - the holding period begins when you acquire the asset, this is different than the date in service..

Thus it is possible to have a split holding period - the basis of the property you have held longer than 1 year with long term treatment, the basis shorter than 1 year long term. I don't recall the specifics on how how the service describes you allocate the sales price, but likely pro-rata to the basis is reasonable enough as long as the "long term" portion is fairly new. 

I honestly don't recall if it was court case, letter ruling, or a revenue ruling, but there was definitely one of those I read in the last few months that had a similar fact pattern - construction of project over several years, and it was deemed to have split holding periods when it was sold.

@Michael Plaks is exactly right - have that conversation with who you are going to work with.  Different accountants will have different standards and requirements.  

That said, the list from @Lance Lvovsky is a great starting point.  For myself it will depend heavily on the sophistication of the client - I have a number that I would never bother asking them for various statements to tie out to their financials or supporting statements for standard accruals since they have a full accounting department responsible for their financials and reconciling their accounts.  

Which goes into a very good mind set to take when providing records for whoever your tax accountant is - you have not hired them as a bookkeeper, and you have not hired them as an auditor - those are very different services.  Take the time to review your financials before sending them and verify they make sense - check that your balance sheet reconciles to your statements, or any other changes in your balance sheet accounts make sense to your expectations.  Review your P&L for what might be misclassified, misposted, personal expenses, etc.  

If your tax accountant needs to piece together your financials, not only is it going to cost you significantly more, but it distracts from what you are hiring them to do (tax compliance and advisory).  

@George Post 

If your wife can reasonably account for her hours to reach the REPS requirements, I don't see why not.  Make sure you are counting only valid hours she puts in - there are some buckets like reviewing financials, looking for new properties, education / research that would not qualify towards the 750 hour requirement.  Looking at the number of rentals you have, assuming they are fairly standard as far as required work, having 3 buildings for a total of 7 units it seems unlikely to me that she would be spending about 15 hours a week on average managing these properties.

I agree that based on the surface information you are providing, it doesn't make much sense to do a cost seg right now.  Cost seg studies are all about the time benefit of money - you pay some extra now, to save some tax sooner rather than later.  In your case, assuming they are already showing operating losses (you noted you do have loss carryforwards), the cost of the study would provide no immediate tax benefit.  If there is a situation in the future where the losses would be helpful - say one of the properties has significant rent increases and starts producing some substantial taxable income, or you sell a property at a gain, - then no reason you can't implement a cost segregation study on one of the originally acquired buildings in that later year.

 Hey Jacob - I work with one of the firms that actually recruits fairly heavily from UNH, and I also work very heavily with real estate clients on the tax side of things. Let me know if you would like to have a call or send me a PM - I always enjoy conversations with students!

I guess how are you planning on making a tax loss in substantial excess of the cash cost on a land lease? If you lose $10k cash and it saves you $3k in tax... you are still down $7k, not exactly a winning strategy.

Tax benefits are a consideration of a deal, but if it isn't a good deal before taxes, it will still normally not be a good deal after considering taxes.

I am not an expert on this, but the firm I work for consults and helps plan these transactions, so I have a handful of clients that partake. Primarily for syndication, but the basics apply to all.

As far as how it benefits the developer - it lets them offer investors a tax deferral opportunity. Say the investor sells their Google stock for a $500k, their basis is $300k, they have a $200k capital gain. They can invest that $200k (keep the $300k) in a Qualified Opportunity Fund (a partnership/LLC most often), which invests in Qualified Opportunity Zone. Doing so defers the tax due on that $200k gain until 2026. Come 2026 that tax is due. Depending on the length of time held prior to 2026, there are basis step ups that occur to reduce the gain recognized in 2026, max of 15%, but note that the first of these time slots ended in 2019 (7 years), so at this point that reduction would be 10% if invested for 5 years by 2026. In our $200k example, this means that if invested today, the taxpayer would pay gain on $180k in 2026. The big tax benefit occurs when a taxpayer holds the investment for at least 10 years - at that point they receive a step up to FMV at the time of sale of the investment - so any appreciation is tax free. So put it all together in very simple terms.... Investor puts his $200k of gain into a QOF in 2020, his basis is $0. In 2025 (5 years) he receives a 10% step up to $20k. In 2026 he pays tax on $180k of gain, his basis is now $200k. In 2035 the investment is liquidated for $300k - the $100k gain is tax free. Plenty of rules and caveats, but this is it in a nutshell.

From a developer looking for investors standpoint having a QOZ option would be great for marketing because it offers investors a way to defer tax along with getting into real estate. The way I have seen it organized is a partnership that is actually the project, and then a QOZ partnership that invests in the project - this helps consolidate all the QOZ investors, and thus your reporting obligations and disclosure obligations are more streamlined. It also makes it easier to keep it organized with attracting both QOF and non QOF investors - less opportunities to create headaches. Also note that from an organization standpoint, it needs to be built into the LLC/other entity operating agreement that it is for the purpose of investing in QOZ, so along with CPAs to assist in the annual reporting, you'll need attorneys who are familiar with the rules to properly organize your structure within the rules.

 I agree, what is your issue with this accountant, other than cost? The bookkeeping sounds cheap to me for a 24 unit, and the year end taxes are very cheap compared to what it would be with many of us on this forum that focus on real estate taxation.

I will note that I have no problems with clients using QuickBooks for multiple properties, but it is garbage in, garbage out. I have had clients completely botch Stessa and QuickBooks, Stessa is much more limited than QuickBooks, but is more investor focused.. Whatever you use if you aren't going to pay for bookkeeping, learn how to use it well. I have clients that pay thousands more for year end taxes than necessary as they don't want to pay a bookkeeper.

The definition of a capital asset is determined at the federal level, not state by state. Most states don't have different tax rates for capital gains anyways.

In any case, Internal Revenue Code 1221 defines capital assets, and it's supporting regulations provide you with more details.

Wholesaling is taxed at ordinary tax rates, also subject to self employment tax. You can also benefit from the up to 20% Qualified Business Income deduction, which helps take some of the sting away from ordinary tax rates.

Capital gains treatment is normally for properties where at least the intention is a buy and hold. Wholesaling is very clearly not this - it is more akin to you buying and selling widgets, or providing a service, than it is to the stereotypical capital gain - buying and selling in the stock market. There are very clear cut definitions provided in the code and regulation on each of these, but the simple examples above are a good way to think of it.