All Forum Posts by: Naseer Khan

@Norman Scott Duncan Yes, you are correct - short term capital gains are taxed as ordinary income, as if it were wages earned at a job. 

I am not an accountant and I am not completely certain with this information You should seek the advice of an accountant before acting. With that said, generally taxpayers are allowed to deduct up to $3,000 of their capital losses from ordinary income, every year until the losses are used up. But to offset larger amounts, there must be a long term capital gain in excess of capital losses for that year. Short term gain will not offset capital losses. 

However there is a distinction if the capital losses came from the sale of real estate vs. other property. The IRS provides favorable tax treatment on the sale of real estate, which treats capital losses as ordinary losses, allowing the taxpayer to deduct the entire loss from ordinary income (see IRC Sec. 1231). Note that there is a 5 year lookback rule that will affect your future capital gains if you treated a capital loss as an ordinary loss and subsequently had a capital gain within 5 years. It can get complicated but take a look at this article I wrote regarding Capital Gains and Losses from Real Estate It explains it in more detail with examples. 

@Norman Scott Duncan Transferring property to an LLC generally should not affect the holding period for long term capital gain status, unless the property was sold to the LLC (vs, it being transferred).

If, for some reason, it is deemed short term capital gain, then it is treated as ordinary income that is taxed at the taxpayer's effective tax rate(s) because short term capital gains are treated as ordinary income. There is no special short term capital gain tax rate. 

This response neither constitutes legal or tax advice nor establishes an attorney-client relationship. Inquirers must seek the advice of their own legal counsel prior to undertaking any course of action related to this inquiry.

@Josh Thomas Take the purchase price and separate the land value from the building value. County tax records may have this information available in property records. The land portion is not depreciable. Take the value of the building and divide by 27.5 because the IRS has allowed taxpayers to depreciate residential property over 27.5 years. That number will be the allowable depreciation per year.

This response neither constitutes legal advice nor establishes an attorney-client relationship. Inquirers must seek the advice of their own legal counsel prior to undertaking any course of action related to this inquiry.

@Norman Scott Duncan Generally, an LLC is treated as a Partnership by the IRS for tax purposes. This means that the income and tax consequences will flow directly to the members of the LLC in proportion to the their respective LLC membership interest. The LLC itself will not pay taxes on the gain from the sale of the property. This will require partnership accounting on your end (K-1 statements).

Another thing to consider is your personal assets - if you have a lot of personal assets (savings accounts, stocks,, etc,) then an LLC will insulate your personal assets from your business (rental property) liabilities. Of course, if you dont have a lot of assets, then the LLC may not be necessary at this time.

@Brent Bechtel The first thing you need to be aware of is the "Due on Sale" clause in almost every mortgage, which essentially says that if you transfer the title to the property without the consent of the lender, then the lender can call your entire loan amount due. So, if you buy under your name, and transfer to an LLC, this clause can hurt you, unless you get permission from the bank.

You may be able to buy the property under the name of the LLC if you personally guarantee the loan. Talk to you lender about that.

If you are able to buy under the LLC, then you and your partner will be "members" of the LLC and you will determine how you want to split the ownership (50/50, 60/40, etc), depending on your contributions of capital and management. You will be treated as a partnership for tax purposes.

You dont need to hold each property in its own LLC. That would require additional paperwork and fees that are likely not necessary. Obviously, there are liability issues that come into play but that is something you will have to look into further and make that determination when the time comes.

Good Luck

This response neither constitutes legal advice nor establishes an attorney-client relationship. Inquirers must seek the advice of their own legal counsel prior to undertaking any course of action related to this inquiry.

@Payman A. The rate for depreciation recapture is 25%, regardless of your ordinary income tax rate. 

Generally, the depreciation recapture does transfer in a 1031 exchange, but there are several factors to take into account and you would need to talk to a 1031 expert for that. 

If you sell the property below your adjusted cost basis, which takes depreciation deductions into account (depreciation deductions reduce your cost basis), then you will not have to pay the recapture tax. 

@Scott W. I agree. If one only plans on only doing one flip per year, then setting up an entity may be unnecessary. 

@Lois Walker @Lois Walker Yes, if in the same year, a taxpayer has a capital loss and gain, then only a  net loss for that year will be subject to the look back rule in the future. The 5 year look back rule comes into play when a taxpayer takes a net loss in one year (which is treated as an ordinary loss) and then has a capital gain within the next 5 years. Then that capital gain will be treated as ordinary gain to the extent of the loss taken in the previous year. 

Disclaimer: This response neither constitutes legal advice nor establishes an attorney-client relationship. Inquirers must seek the advice of their own legal counsel prior to undertaking any course of action related to this inquiry.

@Jeannie Kenes Hi Jeannie - I am a real estate attorney who focuses primarily on real estate investing and I work with a lot of investors all throughout California. Although I am not in the Auburn area, I may be able to provide assistance, as most issues can be handled online. Feel free to reach out. Thanks