All Forum Posts by: Michael Plaks

We are not on the same page, @Nick B.  GP or LP - they are partners. I advocated not making him a partner of any flavor.

If he is a partner (again, any kind of partner), he gets a % of the profit - which conflicts with my suggestion. You can do one or the other. My suggestion: no partner, just a payment. Your suggestion: partner and % of profit. Your choice.

I already mentioned the reasons for my suggestion and my thoughts on being audited (no problem today, could become a problem later)

@Account Closed

Market discount rules are based on the concept that you're getting payments as scheduled. NPNs come with no promise of any kind of future payments, they are essentially due on demand at the time of purchase.

@Oliver Martin

You want a "pretty much guarantee" on a legislative bill that has not passed yet? Funny you.  :)

No disagreement here, @Kevin Romines. 

My point was that holding flips and rentals in the same entity does NOT mean that rental properties automatically4 lose their status. And it is not picking up a fight with the IRS. IRS never raised this argument in my 20 years of practice. 

Could separation still be a recommended move? Sure. I do not know the complete story.

@Joe Wood

On a SFH, a professional cost segregation study is usually cost-prohibitive. You or your accountant are allowed to segregate assets without such comprehensive study. The risk is that the IRS might challenge your allocations, and you will have to prove them.

The IRS does not challenge professional cost segregation studies, but like I already said - they are not worth it for SFHs.

As to your ability to have a large 1st year deduction with cost segregation - certainly possible. 

@Nick B.

I'm not sure what you guys call "sponsor entity position" but, in my suggestion, you own the holding entity 100%, so your payments to this person become a P&L (profit & loss) item when made. In your terms, count against NOI.

@John Newsom

Non-performing notes are what we call grey area. There are no black-and-white laws that apply to them, so different tax professionals have different opinions.

My opinion is that the market discount rules do not apply to NPNs. I believe that 100% of principal payment can be applied towards return of capital until completely recovered. What happens after that is unclear. I would treat it as capital gain, but the IRS may disagree and try to treat it as interest. Like I said - grey area.

Here's the real kicker. What makes a note PN vs NPN, for the IRS purposes? Let's say it's whether it was in default at purchase, fine. But since you're receiving payments, does it mean that it is now PN? And what happens when an NPN is converted into a PN? Nobody knows for sure.

Like my colleagues mentioned, H&R returns are often ridden with mistakes, even for relatively simple situations like yours. But so are returns prepared by some professional tax firms, including CPAs and EAs. In fact, there're CPAs and EAs working for H&R. I know some very good people working for H&R (I don't know why they work there though, haha)

The key is to find a competent person and create a long-term relationship, just like in any other important area: doctors, mechanics etc. The chance of finding such person in a small tax firm is higher than in a chain store (notorious for high turnover) - but you still need to check competence.

Not everyone does a free review, but if you can find someone who does - it's a good way to verify that you got a quality job.

@Aubrey P.

I want to emphasize the critical part in @Ashish Acharya and @Lance Lvovsky answers and make sure you understand how important it is: the step-up basis.

Say the parents spent $500k buying these properties at some point in the past, and today these properties are worth $1.5 mil.  If they transfer the properties to the children now, the children's tax basis is $500k. If they turn around and sell the properties, they have to pay taxes on $1 mil capital gain.

In contrast, if the properties stay in parents' name and eventually transfer to the children via inheritance, the chidren's tax basis is $1.5 mil (or whatever the market value is at the time). If they sell the properties then - they pay ZERO capital gain taxes. This is what is called "step-up basis", and it is a huge deal. So do NOT transfer the properties now.

One exception to this advice would be if the parents are trying to get rid of their assets to qualify for Medicaid later on. Then the children suffer capital gain taxes as trade-off.

@Kevin Romines  suggested that "All assets that you hold in that same LLC will have the status of dealer and be taxed according to that status."

This is a common myth. The IRS might try to go that route, but you can defend against such attack if the properties are true rentals.

Your CPA can have some valid reasons to suggest the change, but concern about dealer status is not a very good reason.