All Forum Posts by: Marina Draper

@Dave Foster YES Dave thank you for catching it! That's right, if the property was primary residence PRIOR to renting it, then the exclusion will be applied 100%, as long as the 2 out of 5 rule is met. If the owner moves into the property AFTER renting it out, the time it was rented will be counted as "nonqualified use", and the proration rule will need to be applied. But again, an LLC owning it will not affect the exclusion eligibility.

@Maximilian Glodde, there are no restrictions on the tax exemption if you transfer the property to the LLC, assuming you have a proof that this property was your primary residence for 2 out of 5 years before the sale. However, be aware that the amount of the tax exemption gets prorated based on the time you lived in it and rented it out. If you live in it for 2 years and rent it out for another 3 years, you will only qualify for $100,000 (250,000/5*2) tax exemption if you are single or $200,000 (500,000/5*2) if married filing jointly. So plan ahead and it's a good idea to talk to a tax planning accountant and plan ahead.

I would go with the line of credit. I don't think it has to be with the same lender as your primary mortgage is. It would be probably easier to obtain it that way though since they already have all your info and account with you.  I agree that you should talk to the local lenders out there and talk to your primary lender.

Hi Christopher, the rule is that you have to calculate the pass-through deduction separately for each business and then combine them to calculate the total 199A deduction. When there are multiple activities involved and one or more have negative QBI (QUalified Business Income), but the total is positive, the QBI for the positive QBI activities is proportionally reduced by the negative QBI before computing the 199A deduction and the ones that were negative will have no 199A deduction and no carryover

Hi Peter, just a quick question - why do you want to free up equity from your property? What are your plans to do with it?

It is more of a legal question and I am not a lawyer, but from my experience, it doesn't really matter in which state you create an LLC since you will have to register your LLC in both states anyway. If you create an LLC in WV, you will need to register it in KY. And if you create an LLC in KY, you will need to register it in WV. Again, I would advise asking a lawyer about it.

Hi Russell, great question! The new 20% pass-through deduction can be a huge tax saving for those who qualify. 

If your taxable income is under $157,500 (single) or $315,000 (married filing jointly), you are eligible for a 20% reduction of your income from pass-through entities. So pretty much 20% of your eligible business income is tax-free!

Pass-through entities are Schedule C businesses, partnerships, S-Corporations, and rental businesses (Schedule E) and LLC's who are taxes as the above entities.

The income from each entity is treated separately, therefore, a loss from one entity cannot offset income from another entity.

Capital gains are excluded from the the pass-through deduction calculation. This deduction is relevant only for income related to a trade or business or passive real estate income.

I would like to add my five cents as well - it's not all about the price. I think it's about what you get from your relationship with your accountant. If they simply do you tax return, it's one thing. But if they help you pay less taxes and avoid potential risks then accounting bill becomes an investment. If you pay $5,000 to your accountant who will save you $15,000 on taxes, it's a totally different picture, right? 

Very often I meet real estate investors who chose to go with a $200 tax return filing accountant who costed them thousands and tens of thousands of dollars in mistakes like miscalculated depreciation, missed deductions, miscalculation of capital gains when selling the property and so on.

I understand you don't want accounting fees to eat all of your profits, but I simply encourage to factor what you're getting from your accountant, weigh it against the price and find the combination that works for you.

Do the numbers make sense though? I understand the sellers want to sell, but are these properties good investments?

Hi Don, do you hold title in your personal name or in the name of your business/company? You pay the mortgage 100% from the account of whoever is on the mortgage docs and on the title.

You need to really educate yourself a lot in regards to accounting and taxes for real estate investment business. It is absolutely different from other types of businesses. Also I recommend to find a knowledgeable accountant who is very familiar with real estate, as not all accountants are.

As a general rule of thumb, you account for all income and expenses associated with the rental property together during the year, and in the end of the year when the time comes to file your taxes you need to calculate the ratio between personal and business use according to the tax guidance.

First, you need to strictly divide direct and indirect expenses associated with your rental property. Direct expenses can be deducted in full (such as advertising and tenant screening), while indirect expenses have to be split proportionally between personal and business use (such as utilities, insurance, etc.). 

You cannot deduct any expenses that are not connected with your rental units, for example, repairs in your private unit.

You are not obliged to have a separate business bank account, but if you want to treat your business seriously, I would recommend you to open one, that way it will be easier for you to calculate your results and file taxes in the end of the year.

I hope that helps!