All Forum Posts by: Michael Plaks

@Pauline Zhao

If you're married, and your non-W2 spouse qualifies

@Nick Cooper

As was mentioned, commercial insurance is more expensive. However, if you're using your car for business, as in doing an appraisal for a client, and you file a claim under a personal policy for an accident during such business trip, your claim could potentially be denied. Sure, "how would they know" and all of that, but I would still talk to a good auto insurance agent about possible riders that cover your business trips and associated risk. 

If a car is used exclusively for business, consider buying it under the LLC and making all payments, including insurance and gas, from the LLC. Commercial insurance is probably a must then.

If the car is used for both personal and business purposes, then all payments should be made from personal accounts.

Either way, get a mileage and expense tracking app and use it consistently to record your mileage and auto-related expenses.

As was already mentioned on this thread, you're mixing together two separate issues.

1. Passive v. Non-passive income. This distinction controls whether you can claim all your current rental losses against your W2 income. You're passive in this respect, and your ability to take losses is limited.

2. Qualifying as a trade or business. Based on your description, you should qualify. There're two advantages you gain: you can deduct all business overhead expenses (as opposed to only expenses specific to maintaining the properties) and, if you have positive net profit after depreciation, you will be eligible for the new 20% QBI (qualified business income) deduction. With your "trade or business" designation comes your obligation to send out 1099s to contractors.

@Kenneth Burke

You're not giving enough details, leaving room for assumptions.

Here're my assumptions. You needed to buy 3 properties for $100k each. You borrowed $250k on your HELOC, enough for 2.5 properties. 40% of the interest on the HELOC is deductible against property A, ditto for property B, and 20% is deductible against property C.

Now these 3 properties are moved into 3 separate LLCs. The wisdom of this step is up to attorneys, and I'm not one. An attorney should advise you on how much this protects your personal assets and what hoops you must be jumping thru.

The LLCs should have documented the fact that they assumed responsibility for their respective portions of the HELOC loan. The payments should have come from the respective LLCs' bank accounts in the 40/40/20 proportion. As long as this is how you run it, it should not create a legal problem, I hope, but this is also an attorney's question. Making HELOC payments from your personal funds might be a problem.

Now you refinanced your house and replaced your HELOC loan with the mortgage proceeds. Let's say you refinanced it for $500k, $250k of which was your old mortgage and the other $250k replaced HELOC. Your tax deductions are now 20%/20%/10% of the new mortgage interest, and these percentages is how the payments should be made from the LLCs accounts. No tax issues. I doubt that this would create additional legal complications, but I cannot have a valid opinion on legal matters, not being an attorney. The LLCs should have documented their consent to you replacing one loan with another.

Various complications are possible, depending on the details of your setup. Do talk to an attorney.

@Leta Eydelberg

To add to @Dave Foster's comment: you're in the middle of the process and at the mercy of an exchange intermediary. (I sincerely hope you do have an intermediary involved, otherwise you don't have an exchange to discuss at all.) Assuming it was an intermediary who said you could not change ownership, my guess would be that they specifically said that you could not change to an LLC jointly owned by the two of you which would be a partnership for tax purposes. There're nuances here, but as Dave said - you cannot do anything that an intermediary won't approve of.

It is possible to transfer the properties into an entity after the exchange is completed, but I would not rush this without discussing pros and cons with the kind of people you're looking for: attorneys and accountants specializing in real estate. 

Since you're open to working remotely, you can choose from many of the tax experts on this forum. As to an attorney, he ideally should be licensed in the state where you own properties, as well as the state you live in, if different. Real estate law is state-specific.

@Leta Eydelberg

Being in the middle of a 1031 exchange is not the best time to find a tax advisor and work on a plan. Sort of like looking for a good pilot and a map while already flying. :)   But better late than never.

You can acquire the replacement properties inside a single-member LLC which is disregarded for tax purposes. But you cannot acquire them inside a multi-member LLC filing as a partnership, that is correct.

I think he implied lust of money. We accountants are sometimes guilty.  ;)

It could be beneficial indeed. However, doing it knowingly is not allowed.

@Jake Decker

As @Daniel Hyman mentioned, you can choose from 20+ accountants on this board, including Daniel, who specialize in real estate. All of us work remotely and serve clients nationwide.

But if you insist on someone local, ask in the local forum:
https://www.biggerpockets.com/forums/763-salt-lake-city-real-estate-forum

@Stephen Gregory

The answer is more complicated than we can cover in an online post.

There're two, not one, tax bases after a 1031 exchange. One is indeed the carryover of the old basis. The other is an additional basis acquired in the exchange - IF you did acquire additional basis.

Parts of the new basis might be eligible for bonus depreciation, but it's a big "depends." Too many technical details here.