All Forum Posts by: Michael Plaks

@Robert Fernandez

A legitimate construction business is active and should generate positive income, LLC or no LLC. This increases your taxes, not decreases them.

If you're talking about having rental properties, and you mention GC in the context of exclusively doing your own rehabs - your separate GC business has to have an intention to make profit and operate accordingly. Otherwise, it is not legit and cannot have losses. You cannot simply state - oops, wanted to make money but lost my shirt working on these rehabs that just happened to be mine.

@Tyler D.

The quick and dirty to this question? Here we go: Yes. Cannot make it any quicker or dirtier. ;)

If you allow it to be just a little bit longer & cleaner: if your RE business generates what is known as a "net operating loss" - you can currently choose to carry it either 5 years back to 2015 or forward to 2021 and beyond.

@Phillip Henderson

LLC is a an issue of legal protection - i.e. a question for lawyers. Not being an attorney myself (luckily), I do not believe that there's any legal protection that you gain by placing the property you live in into an LLC, only various headaches.

For tax reasons, it makes no difference.

Also, house hacking is not investing. It's a kiddie pool where you splash until you're ready to swim. You don't need fancy gear for kiddie pools. Don't overcomplicate it.

Yes, you can. But the profit from selling your builds will be taxable as ordinary income + self-employment tax. Whatever is left can be invested in rentals.

I think we mixed two completely different issues together: A) Can we take it out?  vs. b) Should we take it out?

A. Can we take it out?

As I already said, the current wording of the law is extremely broad. Practically anyone can argue he had some kind of adverse financial consequences, until it is defined, and it may never be defined. In the past similar events (9/11, hurricanes etc), the IRS did not specifically connect the amount of distribution with the amount of economic loss. There's no practical way to do so, and there're no resources to verify and enforce it. Short answer: probably you can.

B. Should we take it out?

Before you do, keep in mind two facts:

1. you will NOT put this money back when it is time to do so. Nobody ever does, despite the initial intention. Don't fool yourself. You will end up paying tax on it, as a result.
2. you will, as a result, deplete your retirement account and its tremendous potential for tax-free or tax-deferred growth

Consequently, if you do pull your retirement money out, you better be sure that you can generate a better long-term investment results outside your retirement accounts than you could inside such accounts. Very rarely it is the case.

In reality, most people who take the money out now will end up burning through it and regretting it. And no, I'm not really interested in debating my opinion on the matter. You're perfectly entitled to yours if you disagree. Peace.

Your argument can lead to a conclusion opposite to yours. If they're after collecting revenue, they should disqualify as many distributions as possible and assess the 10% penalty.

@Nick B.

The phrase in the Act is “adverse financial consequences”. This is as vague as they come. Your interpretation is no better or worse than mine, at least until there is more specific guidance.

For what it's worth (not much currently), here is my interpretation: you need your IRA money to compensate for some other money that disappeared. Losing your portfolio value does not fit this view, because you were not drawing from it. Losing your syndication distributions might work.

For example, if you have a $100k W2 income and $50k annual K1 distributions that have now disappeared - drawing $50k from your IRA to compensate sounds like exactly what the Act meant to cover. If, on the other hand, you live on $200k W2, and your only financial hit is losing a $10k K1 distribution, I cannot with a straight face claim that drawing $100k from your IRA is due to "“adverse financial consequences.”

@Mike Sola

You cannot 1031 a flip. 1031s are for rentals.

The less you're seduced by silly abbreviations like BRRRR and fancy strategies like 1031s - the better. They make you feel sophisticated and all, but the real challenge is to make that $20k on a flip. It's far more difficult than it sounds. Good luck.

@Michael Moikeha

The reason nobody responded to your question is because your description does not come close to actually describing what happened. You threw in some pieces but not the whole picture. Start by describing the parties of each deal and the history of the 1031.

@Daniel B.

You absolutely will have to pay some taxes. The question is how much, and it's impossible to dissect all the details in an online post. Professional help is highly recommended.

For tax purposes, you had two properties, not one. The smaller unit has always been a rental property and needs to be treated as such. Keeping it vacant for a period of time is not likely to change things, but I cannot tell this for certain without an in-depth discussion.

The bigger unit has been converted from rental to personal and then back to rental. It most likely qualifies for a capital gain exclusion (again, details matter, so this is a preliminary conclusion), but you still owe taxes on all depreciation taken for this unit.

Both units will generate some taxes. And, as you can see, it's rather complicated.