All Forum Posts by: Michael Plaks

@Michael Batshon

Maybe you're missing a good point made by @Terry Lao. California, as ridiculous as it is with its tax laws, luckily taxes net income from renting - i.e. rent minus deductions minus depreciation. If the result is negative - then you're not paying any additional tax to CA and may, in fact, pay less tax to CA.

Where CA will always get you is when you either have a positive net (after all expenses) income from renting or when you sell this property.

@Sandro DeAngelis

In some cases, there might be a way to restructure your sale and redirect a portion, maybe even most, of your profit into a retirement plan. Then you escape the tax and can invest the money in mutual funds as you want to. The flip side of this coin is that you will not have access to this money until retired, and then you will be paying taxes on the money when taking it out. 

This is rarely the best strategy, but if this is something you want to explore, you'll need to consult with a good tax accountant and see if you can structure it in your specific case. It's not automatic and requires an advance planning.

@Matt Powell and @Lana Lee

Yes, @Natalie Kolodij is absolutely correct. 

Just to clarify - the new tax reform rules apply to HELOC interest as a personal deduction on Schedule A. When buying an investment property, the HELOC interest is deducted as a business deduction on Schedule E (or C).

That is not how it works, actually.

The partial exclusion limits the maximum, not the gain. So if you lived there for 1 year and meet the unforeseen circumstances test - then you can deduct up to $125k instead of up to $250k (double if married) - but it can still be 100% of your gain.

I hate to be cruel in telling you that there're some problems that a 1031 cannot solve.

World hunger is one. "Disqualified use" for an appreciated rental where you move in for 2 years is another. A 1031 does not erase that problem, it carries into the replacement property. Sorry.

There's a plan that can actually work, but it's somewhat of a hassle to implement, Die and have that property go to your children. Now it is tax free for real. Most of my clients do not want to do so, for whatever reason.

If you moved because of military orders, you still qualify, only with a lower maximum, which should not be a problem.

And you're still unclear about the use of the property. So it was your residence for 1.5 year, and then you moved out and started renting it? If yes, and you moved out less than 3 years ago - you're fine, no need for a 1031.

@Ian Montanio

You don't have to wait until the other property is placed in service. Just relocate the tree to the other side of the fence before cutting it down - and you're in business. (Just kidding, of course.)

Seriously though, since the cost of removing a tree is under $2,500, you can simply include a "Safe harbor de minimis" election with your tax return and avoid the entire debate.

Click here for an explanation, but skip the tedious details and just scroll down to "How do you elect..."

@Remone R.

It does not. You can only eliminate 1/4 of your capital gain.

It's as if your property is split into two: personal and business.

@Ari Bachrach

Couple additional points to add to my colleagues' excellent answers.

The 15% savings that  @Ashish Acharya mentioned are not guaranteed. It's case by case, and discussing it with your CPA is a must.

Beware that an S-corp election makes quite a few things more complicated. If your CPA does endorse an S-corp, make sure to ask him about changing your business practices to comply with S-corp rules.

When doing distributions, remember to leave enough money in the company account for future expenses, including paying the CPA.

If you're planning to dissolve the company, I recommend prepaying the CPA before dissolving. (And give him my contact info, so he knows where to send a thank you card.)

@Fletcher Caulk

Your question worries me. You said "selling my home." If this is your personal home where you live currently or lived until recently - then you do not need a 1031 exchange and likely cannot legally do it even if you want to. I hope you meant "an investment property that I owned in CA."