All Forum Posts by: Michael Plaks

 You know we're opening a can of worms here. 

• Should not separate LLCs be treated as separate entities?
• What if it's a Series LLC?
• What if it is one LLC with multiple lines of business?
• What if one LLC is owned 50/50, and the other 40/60?
• and so on...

This will be fun for months

@Brandon Hall

Speaking of "per business"...   

If I have 10 properties spread between 3 LLCs. Do I have 1 business, 3 businesses, or 10 businesses for the 20% calculation? How do you read it? Admittedly, I did not spend enough time looking, but I did not see a clear answer at a first glance.

So what you're suggesting is to "create" income on a new property by reducing depreciation, expecting losses from existing properties to cancel out that income.

Then you still have zero combined income, ONE of your properties benefits from 20% freebie, and nothing lost over the life of the property, because less depreciation results in less depreciation recapture. No immediate tax savings, but less capital gain in the end. Without a 1031 or step-up, it will pay off when sold.

Now THAT is something marvelously creative. Thumbs up.

And now, my reservations about the "allocate more to land" strategy suggested originally by @Brandon Hall and replicated in my post right above.

Say, my property rents at $10,000 annually, and my holding/operational costs are $7,000. My depreciation is $3,000, for $0 net income. Since there is no net income, there is no 20% deduction. 

If I understand what Brandon suggested, we re-allocate the property basis more to the land (using one of the alternative valuation methods, legally). Now, depreciation is only $1,000 instead of $3,000. So we have $2,000 net income. Great! We created a "freebie" 20% deduction of $400. But - we now have $1,600 taxable net profit!

We cannot squash this net profit with more deductions. More deductions would mean that we have to collapse the remaining income and, with it, the 20% deduction - defeating the purpose!

In other words, the only way to create room for 20% deduction is to create taxable income - where there was none previously! So we will be increasing our taxes just to make room for the 20% deduction. You lost me here, Brandon. Please tell me what am I missing. (Yes, I sometimes can't see the obvious, sorry.)

Now, you mentioned that by taking less depreciation we will reduce depreciation recapture at sale. Sure, I get it. But it seems that the price for this eventual "break" at sale is paying more taxes every year that we own the property. That is a bad trade-off, even considering the 20% discount. We are essentially PRE-paying the future capital gain! The capital gain that could be deferred into 1031 or stepped-up at death. Something does not add up for me.

Apology in advance if my analysis is missing your point. Thanks, Brandon!

@John Akolt

Below I copy/pasted from another thread a hard-to-find description of this "allocate more to land" strategy provided by its author @Brandon Hall (For the record, I think this strategy is debatable, which is exactly what I will do shortly.)

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Here's one that we've come up with.

For new acquisitions, if the rental will likely generate passive losses, allocate more basis to land and take less depreciation.

The new pass-through deduction is a freebie. But the deduction is only available if you have net taxable income after all expenses, including depreciation and amortization.

So when you buy the next property, allocate more basis to land. This will reduce your depreciation expense. But if you have a smart tax advisor, you can likely net out the lost depreciation expense with this new freebie deduction.

The tax benefit is realized on the sell-side. When you liquidate a rental, you pay depreciation recapture taxes on the depreciation you've taken over the life of the rental.

So if you report less depreciation over the hold period, you pay less recapture taxes in the end. But best of all, it didn't hurt you during the hold period because you utilized this new freebie deduction each year to bring your taxable income down to $0.

Note: this is not a relevant strategy if you purchase property that is likely to produce high amounts of net income after depreciation every year (NNN, Commerical, Large Apartments, Short-Term Rentals).

Second Note: more planning will be required for folks that want to utilize cost segregation. You don't want to crush it on the cost seg side and not be able to utilize this freebie deduction because you no longer have net income to report. 

@Gulliver R. - now, the state law prohibition pointed out by @Nghi Le is an entirely different conversation. I'm no expert in your state law, but obviously you can't pay something that the state is not allowed to accept.

@Gulliver R. I strongly disagree with @Victor N..

Yes, you can wait and deduct in 2018, too, but the reason to prepay is not because you won't be able to deduct it next year. It is to grab your tax deduction in the current year, one year sooner. 

Even more important this year, because the rates are going down, so you should generally get more mileage out of your deduction this year.

Of course notice my "generally" safety valve. There're plenty of possible scenarios where paying next year could be better, but it would require a case-by-case analysis.

@Nicholas Aiola

I have always been unsure about this. From the 1098 instructions:

"File this form if you are engaged in a trade or business and, in the course of such trade or business, you receive from an individual $600 or more of mortgage interest... You are not required to file this form if the interest is not received in the course of your trade or business..."

This appears to relieve @John Laney's dad from the 1098 reporting requirement.

Next, from the 1099-INT instructions:

"Interest excluded from reporting. You are not required to file Form 1099-INT for interest on an obligation issued by an individual..."

This appears to relieve John from the 1099-INT reporting requirement.

Disclaimer: I'm not sure that I'm correct. I invite my colleagues to chime in.

PS. But the interest IS deductible if the loan is secured by the property, even without the reporting forms.

@Alex M. - no, I do not think you need to beat the clock and create it this week. What I meant is that you do not have to wait until you decide on S-corp before creating the LLC(s). You can create your LLC(s) anytime, as soon as you figure out in which state. And state question is not my area, it should be an attorney's call.

The thing about attorneys (advance apology to you guys) is that they will never agree on asset protection. Ask 3 attorneys - and you get at least 3 different opinions, sometimes more. :)  I always tell my clients to find ONE attorney who appears competent, approachable and reasonable - and follow whichever asset protection religion he practices. Don't ask for a second opinion, as it's almost guaranteed to contradict the first opinion. And a 3rd opinion will contradict both 1st and 2nd, instead of siding with one of them. Some days I wish I were an attorney.

I completely agree, @Brandon Hall. If my client deducted a prepayment, and the IRS disallowed it, I would certainly take such case to argue.