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All Forum Posts by: Michael Plaks

Michael Plaks has started 107 posts and replied 5259 times.

Post: EXPLAINED: Itemized vs Standard deduction - 2025 version

Michael Plaks
#1 Tax, SDIRAs & Cost Segregation Contributor
Posted
  • Tax Accountant / Enrolled Agent
  • Houston, TX
  • Posts 5,319
  • Votes 6,348

A lot of confusion popped up due to the "SALT deduction" increase in Trump's One Big Beautiful Bill Act (OBBBA). I wrote a separate post specifically about SALT. This post below is a prequel that explains the basic concept of Itemized deductions.

1. This is all about personal deductions, NOT business deductions!

Your business deductions are always "itemized" in the sense that you have to add up your expenses and group them by categories. And your business deductions are always allowed.

You may want to yell - not always, my rental deductions such as depreciation are NOT allowed!!! Wait, let's clarify this. Your business deductions, as I said, are always allowed. However, if deductions for your rental properties are more than your rental income - yes, indeed, your resulting losses may be limited. However, they are not lost or wasted, they are simply pushed into the future years.

In contrast to business deductions, your personal deductions often do get wasted or lost. This is where Itemized deductions compete against Standard deductions.

So let's be 100% clear. Property taxes and mortgages on your rental properties are business deductions which are always fully allowed. Nothing changed here. However, property taxes and mortgages on your own home are personal deductions. SALT and Big Beautiful Bill do matter for personal itemized deductions.

2. AGI - Adjusted Gross Income.

We start by figuring out your total personal income: your W2 job wages, your interest and dividends, your capital gains, your retirement distributions and so on.

We then add your business and rental net income. Net income means income after subtracting deductions. If you're a Realtor, your net business income is your commissions minus all deductions such as marketing, driving, technology, fees and so on.

If you're a landlord, your net business income is your rent minus all deductions such as mortgage interest, property taxes, insurance, maintenance, depreciation and so on. At the end of the year, you may have a net business loss rather than income. For a Realtor it means a bad year. For a landlord it often means smart tax planning.

Now we combine your personal income and your net business income (or loss) - and we have your AGI - Adjusted Gross Income. Of course, more things go into AGI calculation, this was merely a very brief introduction.

AGI is the number that matters when you qualify for a loan or financial benefits, by the way.

3. How personal deductions affect your taxes.

Your taxes are not applied to your AGI. They are applied to your taxable income - which is your AGI minus your personal deductions.

Let's take a quick example:
- Your W2 was $100k. But you are not paying taxes on $100k.
- You also had a rental property that showed a $10k net loss after depreciation.
- Your AGI is $90k ($100k - $10k). But you are not paying taxes on $90k.
- Your personal deductions are $30k.
- Your taxable income is $60k ($90k - $30k).
- $60k is what you are paying taxes on.
- Not on your $100k W2, not on your $90k AGI, only on $60k.

I hope this is very clear: the more personal deductions you have, the less taxes you pay.

4. A no-questions-asked gift: Standard deduction.

You can always take a standard deduction (with some rare exceptions). This standard deduction does not require any receipts, any proof, any tax forms. You just take it. It is as easy as it sounds.

How much is it? Standard deduction was temporarily doubled by the first Trump tax reform in 2018, and the 2025 law made those double amounts permanent, yay!

Single people can take about $15k as a standard deduction, and married couples can deduct about $30k. The exact amounts (slightly increased by OBBBA) will be automatically applied by your tax software.

5. Can you top this? Itemized deductions may be a better alternative.

Itemized deductions throw a challenge your way. Can you beat the fairly generous standard deduction by listing all allowable deductions line-by-line aka itemizing? If the total of your itemized deductions is greater than the standard deduction, you can deduct the bigger of the two numbers.

Important to remember: it's either-or, not both. You add up all your itemized deductions. If the result is higher than the standard deduction - you win, you take the bigger number. If the result is below the standard deduction, you stay with the standard. Either way, you take the bigger of the two numbers. You don't dip below the standard deduction.

Should you bother itemizing? If you manage to top the standard deduction - sure, your efforts pay off. And if not? Well, then you simply wasted some time, that's all. We waste plenty of time anyway. I do.

Another important thing to remember: you can freely switch between standard deduction one year and itemized deductions next year, and then back to standard if it works in your favor. There are no restrictions on such back-and-forth, unlike the tax rules around mileage allowance for driving.

6. So, what counts as itemized deductions?

The list is long, and each item on the list comes with its own rules and small print. Here are the four most common itemized deductions:

State or local sales taxes. If you live in a state with state income tax, such as California or New York, you can count the income tax you paid to your state for last year. In income-tax-free states, such as Texas and Florida, you can instead count sales tax on your last year's purchases.

Property tax on your home. Remember, this is tax on your personal residence only, not on your investment properties. Your second home counts, too, if you have it.

Mortgage interest on your home. Again, we are only counting your personal residence (or two) here, not your investment properties.

Charitable donations. Caution: only donations to qualified charitable and non-profit organizations count here, and documentation is required if the IRS gets suspicious whether you're inflating your good deeds.

I will repeat that this is only a partial list, and every item has its own restrictions.

Now it is number crunching time. Add up the four items listed above. If you're coming close to the standard deduction, then a more thorough job is needed to maximize your benefit. If you're way below the standard deduction, then just take the giveaway standard and call it a day.

7. SALT

The first two of the four main itemized deductions - state/local taxes and property taxes - add up to what is known as SALT.

Before 2025, the tax law limited SALT to $10,000. Anything above $10,000 was wasted as far as tax benefits go. If you paid high income taxes to your state or high property taxes to your local tax assessor or both - then you likely ran into this limitation. It was very annoying, to put it mildly.

The Big Beautiful Bill changed that $10,000 SALT limit to a far more reasonable $40,000 number. Predictably, with some restrictions and only temporarily. See my separate post about SALT and OBBBA.

8. The Big Ugly Lie dispensed by Realtors and lenders.

For obvious reasons, Realtors and lenders want to use tax benefits as selling points. They love to say: your property taxes and mortgage interest are tax-deductible!

This sounds great and is technically correct. Except that, practically speaking, taxes and mortgage interest being tax-deductible usually does not save you anything. Especially not before 2025.

How so? Well, let's take an example.

- $5,000 state income tax
- $10,000 property tax on your home
- $15,000 mortgage interest on your home
- $3,000 donations to your alma mater

Under the old SALT rules, the first two numbers together were capped at $10,000, even though the total was $15,000. Given this pre-2025 cutoff, we have:

     $10,000 + $15,000 + $3,000 = $28,000.

Considering that the standard deduction for a couple is $30k, we have absolutely zero benefit from itemizing. In other words, owning our home saved us absolutely nothing on taxes. Ouch!

But Trump just quadrupled SALT! True. Let's redo our math under 2025 OBBBA rules.

     $5,000 + $10,000 + $15,000 + $3,000 = $33,000.

Aha! Now we win! Well, kind of. We exceeded the 2025 $31k standard deduction by a whooping $2k! Yes, it does save us a couple hundred dollars. But it's not much of a monetary reward for paying $10k in property taxes and $30k in mortgage payments. Nice try, gentlemen.

I'm not against home ownership, not at all. I own my home. But not because of the tax benefits.

9. State income tax quirks.

Every state with a state-level income tax has its own set of tax laws. Maddeningly, most of those states chose to be non-conforming. What it means is that they say: we do not care what the IRS does for Federal taxes. For our state taxes, we are going to do it differently.

And, to make things more fun (for state legislators) and more aggravating (for the rest of us), each state does not conform in its own random way.

Guess what? If you live in a state with state income tax, you need to understand your state's rules. Super annoying, I know.

State-specific treatment of itemized deductions is way outside the scope of this post. Besides, it is a moving target, because states are going to react to OBBBA in their own ways. As always, they will choose different paths, so have fun figuring out what your state is going to do now.

The only advice I can give you here is to work with a tax professional who is very familiar with your state's unique tax rules and keeps on top of the most recent state-level changes.

Or move to one of the states that does not have state income tax, like Texas or Florida. Then you won't need to worry about state tax rules, not to mention paying taxes to your state.

10. Are there other tax planning opportunities around itemized deductions?

I'm glad you asked. Of course there are, and now with OBBBA more so than before. Find yourself a good tax accountant. Here is how to find one. We would love to help you.

Post: Leasing My Property to My Business

Michael Plaks
#1 Tax, SDIRAs & Cost Segregation Contributor
Posted
  • Tax Accountant / Enrolled Agent
  • Houston, TX
  • Posts 5,319
  • Votes 6,348
Quote from @Kwanza P.:

I'm closing on an STR in Texas (I live in California). I purchased with conventional and the lender doesn't allow me to transfer to my LLC.

Is there a way for me to lease the property to my business ? Do I need to?


It is unclear what you are trying to accomplish and what you are concerned about. Since I'm an accountant and not a lawyer, I can only address the tax side of your question.

For tax purposes, you can treat your STR as owned by your LLC, without jumping through these lease-to-yourself hoops. I assume this was your goal.

If your LLC is a single-member LLC, i.e. owned just by yourself or by you and your spouse, your business is most likely reported straight on your personal tax return. It's just a few separate pages of your personal tax return. 

In fact, your LLC is not even mentioned on your STR-related pages. Your tax return looks exactly the same with or without your LLC. Zero worries about the title or the loan's borrower, tax-wise.

If your LLC files its own separate tax return (which would be unusual for your situation and requires another conversation) - your LLC can still treat this STR as LLC-owned, but you would need to create some documents to make things compliant.

Now, to potential complications. The first is your California LLC tax return. It will need to include the STR, and it should not change your $800 annual extortion fee, unless your LLC is doing other business besides this STR.

The second potential complication is legal issues. I will leave it for attorneys to comment, as I'm not one of them.

Your third potential complication is insurance. This is for your insurance agent to deal with.

Post: Looking for Cost Segregation Firm for 2 Medical Office Buildings in Northern Californ

Michael Plaks
#1 Tax, SDIRAs & Cost Segregation Contributor
Posted
  • Tax Accountant / Enrolled Agent
  • Houston, TX
  • Posts 5,319
  • Votes 6,348
Quote from @Varun Chawla:

Hi BP Community,

I’m looking for a reliable but not overly expensive cost segregation firm to conduct studies on two medical office buildings located in Northern California. Details below:

  • Property 1: Purchase Price: $2M, Capital Improvements: ~$1M,Placed in service: 2021

  • Property 2: Purchase Price: $1M, Capital Improvements: ~$250K, Place in service: 2022

Both are active-use medical buildings. I'm hoping to maximize depreciation benefits without spending a fortune on the study itself. If you’ve had a good experience with a firm or individual that’s cost-effective and understands commercial/medical properties, please drop their info or PM me.

Three of the cost seg companies used by our clients are operated by experts active here on BiggerPockets. Reach out to them:

@Bernard Reisz
@Yonah Weiss
@Julio Gonzalez

Post: So-Called "Audit Protection" does not protect

Michael Plaks
#1 Tax, SDIRAs & Cost Segregation Contributor
Posted
  • Tax Accountant / Enrolled Agent
  • Houston, TX
  • Posts 5,319
  • Votes 6,348
Quote from @Bruce D. Kowal:

Now, maybe they will go after all those Notes Payable/Receivable on S Corps and LLC's and look for interest income and expense.


Why would you give them any ideas? 

Post: Cost Segregation- what kind of study is best?

Michael Plaks
#1 Tax, SDIRAs & Cost Segregation Contributor
Posted
  • Tax Accountant / Enrolled Agent
  • Houston, TX
  • Posts 5,319
  • Votes 6,348
Quote from @Jason Milko:

We recently purchased our first rental, and are approaching our first tax season as landlords. I just learned about the cost segregation study, and how it can save an investor a lot on taxes. From my research, I see that there are differing levels of detail and support available for these studies. The primary categories are 1) DIY, 2) hire someone for a virtual evaluation, and 3) hire someone to walk the property and evaluate. 

Obviously each of these 3 come at different price points and different levels of security. What is the sweet spot for someone just starting out with little cash at their disposal? I would prefer to save money but understand the long term trade off of a more expensive option. Is the added cost of option 2 or 3 worth it? How much risk is taken on by going with the cheap option?

This post answers most of your questions:
https://www.biggerpockets.com/forums/51/topics/1136752-expla...

Post: Cost for STR Accountant (Strategy, Planning, Filing)

Michael Plaks
#1 Tax, SDIRAs & Cost Segregation Contributor
Posted
  • Tax Accountant / Enrolled Agent
  • Houston, TX
  • Posts 5,319
  • Votes 6,348
Quote from @Kyle Anderson:

I am new to the STR game and I recently bought my first place a couple weeks back. I am in the hunt for an accountant that understands STRs and can help me plan, strategize and file. What is the typical yearly cost for something like this for one property. I got quoted $4,000 with the first accountant I met with. Does this feel right?


Kyle, this is why your question misses the point:
https://www.biggerpockets.com/forums/51/topics/1088325-expla...
https://www.biggerpockets.com/forums/51/topics/998718-explai... 

Post: So-Called "Audit Protection" does not protect

Michael Plaks
#1 Tax, SDIRAs & Cost Segregation Contributor
Posted
  • Tax Accountant / Enrolled Agent
  • Houston, TX
  • Posts 5,319
  • Votes 6,348
Quote from @Brian Kiczula:

@Bruce D. Kowal well said I am new to BiggerPockets and just starting to connect with other professional on the platform. I recently came across a company that had a IRONCLAD Audit Protection. 


Using the word "ironclad" (and in all capitals, to boot) tells me two things:
1. no understanding of what "audit insurance" really means
2. likely a paid referral arrangement with that company

I don't care about the latter if it is true, and I issue my advance apology if it isn't. There's nothing wrong with paid referrals anyway.

Let's talk about the "ironclad" part. Absolutely nobody, not this company, not Bruce, not myself - none of us - can guarantee a favorable outcome of an IRS audit. This is similar to lawsuits: even the best lawyer in the world can lose a case. 

Also, nobody can guarantee that an IRS audit will not happen. As Bruce said, audits these days are very rare, but they still exist, and nobody can insure you against you drawing an unlucky lottery ticket.

The only true meaning of "ironclad" could be this: 
We guarantee that, should you get audited by the IRS, we will not charge you for dealing with the IRS on your behalf.

This is as far as it can go. Any assurance past that is 100% hot air. 

Here is what is missing from the above assurance:
We guarantee that we will assign the most knowledgeable expert to defend you against your IRS audit, and we guarantee that this expert will invest MAXIMUM available time and effort and skill into your case.

Yes, I just used all caps myself, and for a good reason: this is the only thing that really matters. Because here is the reality, coming from an industry insider: the tax professionals who take such audit protection cases from those national tax companies are paid ridiculously little money for these jobs. Also, they are paid flat fees.

It does not take a rocket scientist to figure out that their motivation is the opposite of what you want: they want to invest the MINIMUM possible time, effort and skill into defending you. They really can't afford anything past the bare minimum.

The result will usually be what Bruce described in his post: you get screwed. But, if it makes you happy, you did not have to pay someone like Bruce or myself who could defend you for real. 

No miracles. You get what you pay for, most of the time.

PS. For background, I've been an EA for 30 years and have successfully defended dozens of my clients against IRS audits. (And I will never accept the crumbs which are audit representation cases from "HyperTax" and their likes.)

Post: Bonus Depreciation Eligibility for New Construction

Michael Plaks
#1 Tax, SDIRAs & Cost Segregation Contributor
Posted
  • Tax Accountant / Enrolled Agent
  • Houston, TX
  • Posts 5,319
  • Votes 6,348
Quote from @Kevin Aumack:

 Thank you for the clarification! That’s a major nuance.

Taxes generally are a major nuisance, full of nuances

Post: Bonus Depreciation Eligibility for New Construction

Michael Plaks
#1 Tax, SDIRAs & Cost Segregation Contributor
Posted
  • Tax Accountant / Enrolled Agent
  • Houston, TX
  • Posts 5,319
  • Votes 6,348

Incorrect, Kevin. Generally, depreciation is indeed determined on the date the property is placed in service. However, the new Trump bill limits the reinstated 100% bonus to property acquired after 1/19/2025.

Here is more: https://www.biggerpockets.com/forums/51/topics/1249780-expla...

Post: CPA recommendations for tristate area

Michael Plaks
#1 Tax, SDIRAs & Cost Segregation Contributor
Posted
  • Tax Accountant / Enrolled Agent
  • Houston, TX
  • Posts 5,319
  • Votes 6,348
Quote from @Cecilia Fields:

I've been reading and keeping up with the Bigger Pockets community and I've learned so much valuable information. I've come to the realization that while my portfolio is small, it's best if I start tax strategizing now. Does anyone have a CPA they would recommend in the tristate area? I'm current in Jersey and looking for a new CPA that's very familiar with the real estate tax laws. 

Here is how to find one of us tax professionals, including an explanation why looking locally is no longer a thing. Even my local clients communicate with me virtually post-Covid.
https://www.biggerpockets.com/forums/51/topics/1222774-expla...

Another point explained in this post is that we are not allowed to tell you "I will be happy to help you" until/if the moderators move your post into Classifieds. But you can reach out to any of us on your own.