All Forum Posts by: Michael Plaks

@Michael Zagorsky

Forget the conversion for a moment. Let's say this is just a rental all year. If you happened to use it for 5 days for your family, then you have 5 personal days and 360 rental days. This does not create any tax problems, because of too few personal days to matter.

If, however, you used it as your summer house for 2 months, now you have 60 personal days and 305 rental days. This does create a tax problem, and you have to deal with complex "vacation home" rules that @Ashish Acharya mentioned.

You happened to quote a section of the IRS publication that attempts to clarify what exactly counts as those 5 or 60 days in my examples. But since it's the IRS trying to explain things, the result is the opposite.

This is what the IRS tried to say. If you converted this property to personal after renting it for awhile, that whole game of counting personal v. rental days is over. It only matters for the first 9 months it was a rental. For those months you still have to count personal v. rental days.

But once it's converted, none of it matters. It is now a 100% personal property, and you no longer need to count days. What you need to do instead is allocate expenses between the 9 months of rental use and the 3 months of personal use.

For the 9 rental months, you deduct all expenses and depreciation on Schedule E. For the last 3 months, you can only deduct a prorated portion of mortgage interest and property taxes, and only on Schedule A if you itemize deductions. Otherwise, that portion of interest and taxes is "wasted" for tax purposes. You cannot sneak it onto Schedule E.

@Jake Milan

PM me if you want some local names

@Saravanan Varadan

Please search this forum for "LLC umbrella liability"
This topic has been massaged to death. Probably a dozen threads just this year.

Hint: there's a lot of opinions and no real consensus. Unless you decide to ignore warnings from attorneys about legal exposure and just want to cut corners and take your chances. Then umbrella is that cheap solution that many investors believe (aka hope) would protect them.

CA definitely makes you think twice due to their draconian annual fees for LLCs.

@Anais Hawkins

Scroll two comments up and look at @Natalie Kolodij. Give her a call.

@Joel Miller

Your math is fine, but your overall perspective is not.

1. I assume you realize that taxes are figured on your profit and not on the selling price.

          Deal Profit = Sale Price - Purchase price - Closing costs - Rehab costs - Holding costs - Financing costs
         Business Profit = Deal profit - Marketing - Driving - All other business expenses

As a result, 95% of first-time flippers lose money in their first year. You may not even have much if any tax to worry about, although I certainly wish otherwise.

2. If you do have taxes, then yes, you will always have your regular income tax and your state tax. The self-employment tax is not automatic. It depends on your overall income (you may be maxed out on your Social Security tax thru your W2 job if you have one) and it primarily depends on your real estate business. In other words, it is case by case. Yes, it is possible to face close to 50% in combined taxes in the worst case.

3. Waiting a year does not automatically lessen your tax burden. It might, but only IF your deal will qualify for capital gains treatment. This is also case by case and needs professional input.

4. Holding on to your flip for longer than necessary can be very expensive. First, you incur monthly holding costs (taxes, insurance, utilities) and interest on your loans, and that last one can be crippling. Second, you run the risk of losing your potential buyer who can lose his job, die, get divorced or simply change his mind. Third, you run the risk of the unexpected changes in the environment - from accidents to natural disasters to riots and Covid. I know several very unhappy investors who could close in February of this crazy year but thought it would be OK to wait another month. In 2020.

5. @Don Spafford mentioned the opportunity cost. You could pull the cash and reinvest it into the next great deal. Chasing tax savings at the cost of missing a business opportunity could be foolish.

My general rule-of-thumb advice is to never let the tax tail wag the business dog.

Best luck.

@Jesse Aaron

There're two different meals on the same plate here. Put them on separate plates.

A. Sale of the mobile home. If you lived there for awhile before you sold it, then there is no tax from the sale. If you did not live there, then part of the $18k will probably be taxable. Need more details for a better answer.

B. Investing in the stock market. If you invest $10k and it turns into $15k and you pull the $15k out - you will be taxed on the $5k profit. Never taxed on the $10k you put in.

There is never double taxation for individuals. Even the IRS is not that cruel.

@Giedrius C.

So if two high profile CPAs disagree, let's decide this by committee voting among non-CPAs. Sounds like a plan. :)

Both CPAs are correct, actually. They were answering two different questions however.

Question 1. If I lend money to someone who is a dealer, am I also a dealer by association? The answer is - usually no. It does not matter what the borrower does. You yourself is a casual investor/lender who earns interest and is not subject to self-employment tax for that. By the way, you cannot deduct your business expenses, either.

Question 2. Can I be subject to self-employment tax as a private lender? The answer is - potentially yes. If you do frequent / high volume lending and operate it in a business-like fashion, it may rise to what the IRS calls "trade or business." Then part of your income such as fees you charge would become self-employment income. And it still does not matter who your borrowers are, dealers or not. On the positive side, your business expenses will be deductible.

He cannot, this is against the board rules. Please contact Ethan via private message.

If he was the cheapest, he would not be worth hiring 

Thank you for sharing. Ours were just guesses, as we said. This sounds like the real answer. Great to know.