All Forum Posts by: Michael McLeskey

I don't have that list (nor have I seen it) unfortunately but I can provide some perspective on this.   Big picture what you are trying to figure is if you are 'sweet spot' client for this firm or CPA.  If you are a 'sweet spot' client there is a more likely probability that you'll get value out of the services you want.  Firms come in different shapes, sizes, and specialties and are often best suited to handle a certain type of client.  Some firms focus on individuals, some small business and some in specialty areas.  Some firms are compliance driven (file what needs to be filed and are more reactive) while others spend a lot of time on strategy.  Plan to pay more if you are looking for strategy on a regular basis.  That requires more expertise and creativity than just pumping out a tax return based on what already happened.  With that said it wouldn't be a bad idea to determine the following when evaluating a CPA firm: 1.  What is their ideal client? 2.  Do they have a minimum fee?  3. Who will you be working with primarily?   There's no silver bullet to this - sometimes even getting a referral can backfire - but all of those things should help in your search. 

There are lots of things to consider, but I'll just name a few things that can point you in the right direction.  1.  Whether you know it or not for tax purposes you've got a partnership.  That means you'll have to file a separate partnership tax return.  Both you and your friend will ultimately split the income/ deductions on this so you can prepare your personal return.  2.  Is this a true 50/50 partnership?  Did each of you contribute the same amount to the partnership and therefore are entitled to split the income/ deductions accordingly?  3. If you are not sure about #2 it would be a good idea to have an operating agreement that spells out how you are supposed to treat taxes, legal matters, exiting the partnership, etc.  Partnership taxation is a tricky world but that doesn't mean your filing has to be that way.   Having a clear understanding of some of the basics will go a long way in terms of not only getting the filing done but making sure the communication between you and your partner is clear.   However, if you start adding other partners, contributing unequal amounts of capital, your filing will get complicated fast and should indicate it's time to get professional support. 

@Dusty Laurin I'll add one piece of color to this discussion even though you've got a lot of comments on this. One thing I would definitely say is that you almost never want to real estate in a corporation - whether that is a S corporation or C corporation. I'll leave this answer short and say that it's easy to get the property in the corporation but hard (and sometimes impossible) to get that property out of the corporation without paying taxes. An LLC is the way to go with real estate 99.9% percent of the time. The other big picture question is how much is being 'Real Estate Pro' going to help you from a tax perspective? You certainly wouldn't to use that classification as a license to make superfluous expenses that you don't need. Any idea on what kind of tax benefit you are expecting with that or is that what you are currently exploring?

I can't speak from the lending side of things but to give this some context, depreciation is added back because even though it is a true 'tax expense', it's a non cash expense - meaning you don't have cash coming out of your pocket each month as a result of depreciation.  Thus, it makes sense a lending institution would add that back to income.  In addition, some non recurring expenses may be added back to your income if you can show that those are one time costs and not reflective of future cash flows.  The main thing I wanted to mention was that technically you are not supposed to pick and choose what expenses you choose to deduct on your return.  That seems counterintuitive because if you omit expenses on your return, you would be paying more tax, but overstating income to be able to qualify for a loan is a slippery slope I wouldn't go down.  The short answer to your question is to run a clean, lean operation on your rentals to boost that up and see how you can increase or better leverage your wage income to maximize your borrowing power. 

There a lot of things to consider.  You and a CPA will have to get specific to make sure all of the bases are covered and you can plan appropriately.  The first question I would want to know is if you will be residing in NY once you make this purchase?  From an IRS or NY tax perspective there is a big difference between being taxed as a resident vs a non resident.  That's the first thing to consider from a tax perspective. 

You do qualify (you may have some depreciation recapture at minimum) but FWIW, there is an difference in the IRS' eyes about when you rent your residence in relation to when you lived there as your primary.  To keep it short, I'll just say it is more favorable to live in your home first then rent it (as long as you owned/ lived in the home 2 out of past five years and meet the other requirements) before you ultimately sell it.  If it were the other way around (rent it first, then live in it for 2 years) you would have some non qualified use which would create some gain that couldn't be excluded. 

It's good question and a question that is asked a lot.  I like to think of it this way...When you took out the loan to purchase the property, did you include that loan in your income?  Nope!  So the next question is if you didn't have to include the loan in income when you borrowed it, should you get a deduction when you pay it back to the bank?  The answer to that is 'no' as well.  It all evens out over time but that's the way I like to think of it.  You do get to deduct the interest you pay on the loan because that is a true cost of doing business.  But receipt of loan funds and payment of loan principal is not included in your income.

Very cool @Ashli Baldwin.  Whether you realize or not you are starting down a path that is going to give you some nice tax planning options. The flip side of the coin is that your tax compliance and accounting world is going to getting trickier at the same pace.  It'll definitely be manageable but it'd be nice to have a roadmap of how all of your entities and other income can work together to not only reduce tax but help you make informed business decisions. In general, I do like the tax planning options that exist by having both an operating company as well as a rental property.  I am curious about your interest in a rental property out of state rather than finding a property in state.  There's no hard and fast rule against that of course, however, I do think there should be a compelling reason to go out of state for your first rental.  What do you like about the out of state residential investment options you are seeing?

Ashli - I just saw this thread and thought I would reach out. It sounds like you have a number of good things happening. The fact that you are jumping on this early and have a plan for where you want to go puts you in a better spot than you may realize from a tax, accounting, or strategy perspective. As they say starting off on the right foot makes a big difference in the grand scheme of it all... I am curious about your LLC that you already set up and if you are using it for another business or if you set it up in connection with the property you want to purchase next year. Also, what type of property are you looking to buy? Residential, commercial, etc.? The other thought that is important is there is still time to do some tax planning before year end given that you know you'll be investing in real estate next year. It's hard to say what that could mean without the full context of your tax situation but there could be some opportunity there.