All Forum Posts by: Michael Plaks

@Richard Lima

The $180k number is irrelevant. What matters is the total sale price, including mortgage payoff. So, if you sold the property for $300k, including a $120k mortgage, you would need to exchange it for a property (or multiple properties) worth at least $300k and take a loan of at least $120k.

A lot more rules exist, as @Wyatt Franta described, so don't try it on your own. Get help.

And critically important: you cannot sell the existing property and then start an exchange. You need to first hire some "qualified intermediary" (a company specializing in facilitating 1031 exchanges), and the sales proceeds will be held in escrow by that company. If you sell the property and touch the money - game over, you lost.

For more help, talk to those intermediaries. Two of them are @Dave Foster and @Bill Exeter.

Your CPA is correct that you won't be able to reduce your current taxes with rental losses (unless you can use a loophole of making your wife a full-time investor, as @Carl Fischer hinted).

However, this situation is temporary. The losses are not wasted but saved for the future. The future comes when you sell the property. This is when you catch up with the old losses.

That said, you're looking at the whole real estate game from a flawed perspective: tax savings. You buy real estate for passive cash flow and for long-term appreciation, aka wealth building. Tax benefits are just the icing on this cake.

Dave, the reason for your frustration is that you're trying to learn a fairly complex technical issue in an online post. For example, you calculated capital gains as the difference between the sale and purchase prices. However, depreciation recapture is really a part of capital gains and should be added.

Also, your situation can have many additional items at play.

But I will dance with you. If you really have no other income whatsoever, your AGI would be around $62k ($44k + $18k), and your overall tax would be zero.

@Ryan Linskey

This specific item is not common, but service providers can charge itemized fees for pretty much anything if they wish. I have seen extra charges for mailing papers, for inspections and even for answering emails. Nothing really stops a property manager from such extra charges except the agreement you signed.

Whether preparing 1099s should be included in their management fee is subject to negotiation if not spelled out in the agreement. Both sides have to make a call whether it's worth fighting over.

@Justine Spencer

When you start, entities are not essential, unless you have a particularly high exposure to legal liability - which is an attorney's call, and I'm not one.

If you do decide to go with an entity, pretty much every time it is an LLC. A variation is a Series LLC if you have multiple rental properties - also your attorney's call.

You do not choose between an LLC and an S-corp. An S-corp would be an election of how this LLC is taxed, and you should not make such election when you start.

@Michael Moskos

These days, having a local accountant is not necessary. Remote professional relationships are very common.

That said, your best bet locally is @Steven Hamilton II.

@Dave G.

To answer your specific question: if your ordinary rate is 0%, your depreciation recapture rate is also 0%.

However, as @Natalie Kolodij already pointed out, there is no guarantee that you will stay in the zero rate, especially if multiple properties are sold in the same year.

I suggest looking into more strategic questions first. Such as - why would you want to liquidate these properties? Is spending your non-retirement savings the best way to pay for your life in retirement? How to preserve your capital? Etc.

@Jeffery Olaru

Ha - it was a great networking event. 

You will not be a reseller for these vehicles, because 3 is too few, and you did not buy them with an intention to resell quickly. Short-term capital gains are eligible for QOZ funds, so no problem here.

As far as "manufacturing" more capital gains - no suggestions. You can sell what you already own if you do not need those items or can easily replace them. But buying something else in order to resell for capital gains is breaking the rules.

How many of those do you have? If you're a reseller, then these sales do not generate capital gains. 

Read the definition of capital assets:
https://www.irs.gov/publications/p544#en_US_2018_publink100072479

@Matt Ward

Yes, someone had to open that can of worms. :) 

Pretty much all landlords are interested in qualifying as "trade or business" under Sec. 162. That allows us to take all ordinary business expenses on Sch E, including education, marketing and anything else from the business overhead world. Also, it qualifies the investor for the 20% QBI deduction if they have a net profit. 

Requirements to qualify under Sec. 162 are pretty liberal, so almost everyone qualifies, without that new silly safe harbor. But if we qualify as "a trade or business" - then we become subject to 1099 rules.