All Forum Posts by: Michael Plaks

Umm, disagree with @Dmitriy Fomichenko on the umbrella policy not being necessary for the 1st property. Umbrella is supposed to protect you from a lawsuit pegging you for some insane damages - like if someone is injured or killed on your property. This risk exists with one rental and really even without any rental properties.

But I'm not an attorney, so I may be totally wrong on this uneducated opinion. Let @Brian Bradley chime in.

As @Dmitriy Fomichenko said, you need a separate insurance policy for your rental property. In fact, you need at least two:

1. A policy protecting your investment if it burns down, floods, destroyed by a tornado etc., along with less drastic events such as a burst pipe that floods the property. Depending on the area, it may require more than one policy - i.e. a hazard policy, a flood policy, and a wind policy (not their official names). Sometimes, they are combined. Ask a local insurance agent, preferably the one that works with investors.

2. An umbrella liability insurance. This one protects you if the tenant (or someone else) sues you. Very cheap and very important.

Welcome to investing.

@Jenny Adel

With the size of your portfolio plus additional PM duties, you should be able to qualify.

Unfortunately, there is no defined list of what time does or does not qualify. For example, there were court cases that allowed driving time to and from the properties, and other court cases that did not. 

Time spent on BP most likely does not count. I would still log it, but I would not count on it if you need these hours to clear the 750 hours threshold. Only use them as a buffer but prepare to concede them if the IRS objects.

Again, you probably can find 15 hours a week of "cleaner" activities. Start a policy of inspecting every property twice a month. That alone should make the necessary hours and would be easily justified. Plus interviewing tenants, working with repairmen etc.

Last thing - no real need for a local tax accountant these days of technology. Real estate experts are not that easy to find. Most of us work nationwide, remotely. 

@Dmitriy Fomichenko

I mostly agree with @Nicholas Aiola, minus the private lender part. It better be a business-like operation similar to HM. Multiple loans, processes, in-house valuations, inspections etc. Most casual PLs do nothing besides drinking cocktails at REI socials twice a month and signing papers twice a year.

Caveat: it will also expose the (formerly) interest income to the self-employment tax. So you're saving 20% but adding 15%.

And of course, the risk of the IRS reclassifying it.

The real reason to move a PL operation under the "trade or business" umbrella would not be to qualify for the 20% deduction but to obtain a clear path to deducting all business overhead - which is no longer possible via the old Schedule A route.

Have to agree with @Carl Fischer - logical underwriting is an endangered species. The tricks that Carl described, plus others I have seen, defy logic and sometimes walk the line of being legal - but they do sometimes manage to get past the policy of the day that the underwriter relies upon. Sigh.

@Jess White

I don't think there is a point. Some investors never hire a bookkeeper and do just fine using technology. Others hire a bookkeeper from day one because either they really hate bookkeeping or they figure out (correctly) that they could use their time better doing something more productive.

@Blake Andrus

You're right about today's technology. This forum features at least a dozen of tax accountants specializing in real estate. Browse this forum, read the answers that we provide and contact whoever you like privately.

But do it quick. The IRS deadlines are right around the corner, and some of us may not be taking new clients at this point.

@Ansari A.

Please re-read my earlier answer on this thread, from 6 months ago.

You enter your $4,000 in 2017. If your situation allows it, the software will deduct the resulting loss in 2017, against your W2 income. If it is not possible, the software will automatically designate the loss as carry-forward and complete Form 8582 that will be sent to the IRS when you eFile. You don't need to do anything extra manually.

@Howard L Weinstock

As you alluded to yourself, all this is a gamble on the future of SS system and on your own longevity. If you know how to predict those - teach me.

But if you do flipping, the resulting income will be counted for the taxation of SS benefits, no matter how you structure it. I would just accept the tax on SS as an extra cost of doing well in flipping and being productive instead of retired.

The only way to do flipping without taxation is to do it inside your retirement accounts, as in self-directed IRA. This is a separate conversation though.

@Kevin Kite 

Your story does not add up. If you had a $10k refund disappear, you would have had $30k-$40k of losses from rentals that your CPA first gave you and then took away. These numbers are not normally possible when you have, as you said, a pretty good W2 job. Something is amiss. Unless he increased your income above W2 with positive rental income, which is a very questionable move.

Secondly, swinging that much in deductions back and forth is not usually possible, either. Even if he capitalized some repairs and dialed down on depreciation. Again, I'm uneasy about your story.

If he chose to not deduct expenses that you legitimately incurred - then it is actually illegal. In fact, illegal on two fronts: it is against the IRS rules (yes, believe it or not, you are required to take deductions you incurred), and it can be construed as mortgage fraud if you overstated your actual income by hiding your business costs.

Finally, as @Nicholas Aiola pointed out, all competent lenders add back depreciation during underwriting, so depreciation should not be changed for lending. As Master Yoda would say - strange this story is.

Now, generally speaking, your dilemma is real. Sometimes, business owners and investors do take less aggressive tax positions in order to qualify for a loan. Have to weight the relative importance, just like in many other business decisions.