All Forum Posts by: Michael Plaks

@Kyle Pierce

Unless he lends you his retirement money, as @Carl Fischer suggested, which indeed is not taxed when received (and possibly never) - then he receives interest. Technically, it is called "portfolio income" and is taxed at ordinary rates.

Your lender probably confuses business income with ordinary income. Business income is taxed higher, but his income is not business and won't be taxed higher than ordinary rates.

The only things that are taxed lower then ordinary income are long-term capital gains and C-corporation income. The first one is impossible in flipping, and the second one is really complicated and only works under specific circumstances.

@Mayer M.

There're 3 completely different reasons to create an LLC

1. Regulate control between the partners

2. Legal protection

3. Tax benefits

#1 and #2 are attorney's questions. Asking fellow investors is akin asking neighbors for medical advice: everybody has an opinion, and all of them are wrong. I'm not an attorney, so I won't offer you my opinion. :)

#3 is an accountant's question. There are no tax benefits for rentals when you create any business entities. There could be tax benefits for flips when you create an LLC and choose it to be taxed as an S-corporation or a C-corporation. These benefits are only possible under specific conditions, the first of them being substantially profitable. And these benefits need to be structured in advance - they are not automatic. Need to discuss with an accountant, case by case.

@Carl Fischer

You're correct: for the capital gains, the clock starts on the date of purchase. 

Date in service is for deductions and depreciation purposes.

@Tanh Truong

The IRS instructions are particularly confusing in this area. They say that you need a new EIN when you change from a sole proprietorship to a partnership. Then they say that a disregarded entity is treated as a sole proprietorship. Which sounds like you need a new EIN.

In reality, you do not. Just send them a 8832 using the existing EIN and check the "domestic partnership" box.

As far as your local tax - maybe @Mark Welp can answer this one.

@Mark H.

1. There could be some debate, but generally the closing date. Form 1099-S sent to the IRS will report the date of closing.

2. Listing date does not matter.

Good luck!

@Rachel Cox

You did not mention the most important factor: how are they planning to use this 2nd home?

If it's going to be rented out - then it is a rental property, and they have to report income, subtract expenses and subtract depreciation.

If they are going to use it just by themselves and keep it vacant the rest of the year - then there is no depreciation. The only expenses they could deduct are property taxes and mortgage interest. However, under the new tax reform rules, they are less likely to save money with these deductions. Their deductions could be limited and/or create no difference on their tax bill.

The LLC changes absolutely nothing for taxes. Its only purpose is legal protection. Whether or not this protection is valid and whether or not they need to keep it after they move into this property - those are questions for an attorney familiar with their state law. LLCs and their protection features are governed by the state law.

You would not want to treat it as miscellaneous income, because there're expenses against it.

Short stays (<7 days) - Schedule C. Long stays - Schedule E, but no losses allowed.

Try @Brian Schmelzlen.

If he does not work out for you - you can really choose any tax pro in this forum. Being local is not that important these days, thanks to technology. We all work nationwide.

Make sure that the bank has the plan's EIN. If they issue a 1099 to your SSN, the interest becomes taxable to you, and it's hard to get the bank change the 1099 after it has been issued.

@Tony Varao

Tax hacking is a little more complicated than house hacking. :) 

There are some general rules that you can read about here, and then there's some higher-level stuff that is best left for tax professionals.

But basically - yes, you will divide your property into personal part and business/rental part, using either sq ft or rooms or some other reasonable method. Then you will be splitting expenses accordingly.

The new rules are not just for this year. They started this year and will stay that way. Details are too complicated to dive into when you're brand new to this. Start with learning the basics first.

By the way, the word is "deductibility." Destructibility is what the IRS will do to you if you mess up. (Just kidding.)