All Forum Posts by: Michael Plaks

@Sean H.

I'm not an attorney, so I can't give legal advice. I have seen variations of your scenario implemented, so it should be possible. It is still a sale for a consideration, the secured note being consideration. And yes, it is a form of owner financing with deferred payments. 

@Art Webb

The short answer is yes, but there're many details. Maybe one of my colleagues will be willing to write a long explanation.

If there are good cases specifically for flippers, I'm not aware of them. Would love to see them though.

Until then - the determination is highly subjective.

This does it, Dave! Can't believe you outed me like this. Next time I will use one of your competitors. :)

Despite this despicable betrayal, I agree with you. The new Regulations do not seem to change the rules of the game. We accountants pretty much operated under these new rules anyway. The Regs provided some safety net, confirming that our interpretation was legit. In short: business as usual. 

Amortization is per month. If your loan started in October 2019, you will deduct 3 months worth of amortization in 2019. If it was then paid off in 2020, you will deduct the rest of it in 2020.

Flawed thinking, IMHO. This is how all self-employment income is taxed, not just dealer-level flipping. It will apply when you're a Realtor, a consultant, an eBay reseller, an accountant, a real estate guru etc. etc. etc.  Are you saying that you don't want to make $1M in sales simply because $300k or $400k of it goes to the government? You'd rather make $0 and give none of that to Uncle Sam. 

Now, if that guy said "I'd rather keep all my rehabbed houses as rentals than sell them" - I will agree. Not because of taxes however, even though it does create a very favorable tax position. I will agree because holding rentals is how you build long-term wealth. Beneficial tax rules is just the icing on this cake.

It is somewhere in between the two. :)

If you have a $100k W2 income, then your rental losses, including depreciation, can reduce it down to $75k but not below. If your W2 income is $150k, you cannot reduce it with rental losses at all. Unless you can qualify as a "real estate professional" which you cannot while having a regular 40-hr W2 job.

If you're a full-time non-W2 realtor and rehabber, you are likely to qualify for the RE pro status, and you can then use all your rental losses against your earned income. However, you will still have tax liability, because you can eliminate income tax but not self-employment tax.

Seasoned investors are not necessarily seasoned accountants. :)

When analyzing the Winthrop factors, most people, including @Simon Filip who wrote the above quoted blog, fail to mention the context of that famous court case. Winthrop was selling land plots. It is not the same as selling flip houses. Most of the case history quoted in the evergreen dealer v investor debate also deal with developers and not with flippers.

As a result, the dealer determination for flippers remains highly subjective and controversial. Tony Nitti, a well-respected Forbes tax analyst, formulated it best: "As a Tax Court judge once said of the issue, “If a client asks you if the sale of a piece of property will generate ordinary income or capital gain, tell them you don’t know. Then tell them that no one else in town does either.”
https://www.forbes.com/sites/anthonynitti/2013/12/31/tax-geek-tuesday-does-the-sale-of-property-generate-ordinary-income-or-capital-gain/

@Thaddeus Koster

Points have an immediate deduction on your residence, not on rental properties.

On rental properties, you deduct all loan costs, including points, origination, appraisal and other fees over the life of the loan. It's called amortization. 

Example: points + all fees = $12,000   The private loan is for 5 years = 60 months.
You have an amortization deduction of $200 per month.

Linda, this common confusion comes from the terminology. The Pub refers to the "true" depreciation recapture, i.e. depreciation taken over the straight-line method which does not exist anymore except for very old properties.

What we casually call "depreciation recapture" is properly called "unrecaptured Sec 1250 gain" which is straight-line and not subject to that rule. It's only subject to a higher rate, ordinary rate capped at 25%.