All Forum Posts by: Natalie Kolodij
Natalie Kolodij has started 63 posts and replied 3634 times.
Post: Double-Dip and Triple-Dip Bonus Depreciation
- Tax Strategist| National Tax Educator| Accepting New Clients
- Posts 3,748
- Votes 4,497
Quote from @Stephen Nelson:
Quote from @Stephen Nelson:
Quote from @Natalie Kolodij:
Quote from @Ashish Acharya:
@Stephen Nelson
This is a great topic and one a lot of investors get curious about. That said, you actually cannot double-dip bonus depreciation with a 1031 exchange because the basis from the old property carries over to the new one. If you get additional basis during 1031 because you did a bigger purchase, the added basis is treated as a new depreciable basis. Depreciation only resets for the buyer who makes fresh acquisitions. The main point still stands, though: if you qualify as a REP or materially participate in STRs, those deductions can be powerful. For others, they often get suspended until they have passive income. Transaction costs and financing also need to be weighed before chasing these write-offs.
.
.
.
This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.
This is my understanding as well
As I responded to @Ashish Acharya, I'd be interested in where you're reading the regs differently.
BTW I acknowledge this will be crystal clear if we get another revision of the 168(k) regs for the OBBB that updates the example from the two earlier regs.
Okay I think I did scramble the rules and describe the opportunity too broadly. Sorry.
Thus, after reading what you @Natalie Kolodij pointed to and the FAQ that you @Ashish Acharya pointed to, I think it probably usually works the way you guys say because people don't have replacement property that meets the original use requirements. And then in that common situation you only get bonus depreciation on the excess basis if you do a like-kind exchange.
To get the double dip to work, in comparison, I think you need replacement property to meet the original use requirements. And then I think that's the situation where you get the double dip. But I acknowledge that doing an economically justifiable LKE is hard enough that adding the extra requirement to get "new" replacement property would be tricky.
See if you agree.
Yes I think we're on the same page.
Essentially with that update to new requirements for "used" property impacting things I think it made the double dip a no-go.
I was surprised by the examples you provided still show allowing it on carryover basis - because to me I always read it as because part of the basis is effectively from an asset you've used before- regardless of if the replacement asset is brand new or not, that portion of basis wouldn't qualify.
As you mentioned effectively the same reason no bonus on inherited basis as well.
I really think It's a timing thing for those examples with being the year before the changes in wording is my guess; but as you mentioned we'll have some new examples soon as well.
Post: Double-Dip and Triple-Dip Bonus Depreciation
- Tax Strategist| National Tax Educator| Accepting New Clients
- Posts 3,748
- Votes 4,497
Quote from @Ashish Acharya:
@Stephen Nelson
This is a great topic and one a lot of investors get curious about. That said, you actually cannot double-dip bonus depreciation with a 1031 exchange because the basis from the old property carries over to the new one. If you get additional basis during 1031 because you did a bigger purchase, the added basis is treated as a new depreciable basis. Depreciation only resets for the buyer who makes fresh acquisitions. The main point still stands, though: if you qualify as a REP or materially participate in STRs, those deductions can be powerful. For others, they often get suspended until they have passive income. Transaction costs and financing also need to be weighed before chasing these write-offs.
.
.
.
This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.
This is my understanding as well
Post: Double-Dip and Triple-Dip Bonus Depreciation
- Tax Strategist| National Tax Educator| Accepting New Clients
- Posts 3,748
- Votes 4,497
Quote from @Stephen Nelson:
Quote from @Natalie Kolodij:
My understanding is following a LKE only the excess basis in the replacement asset qualifies for Bonus depreciation; not any carry over basis. (Regardless of if the simplified reporting election is made or not)
Is that being taken into account for the example / suggestion here?
But Regs §1.168(k)-1(f)(5)(vi) "Example 3" and then Reg. §1.168(k)-2(g)(5)(v) "Example 4" describe how bonus depreciation can work with a like-kind exchange. These two examples are the same example, BTW. But mechanically work the way described above.
FYI there's a slightly off topic reddit thread here, Short Story about Tax Strategy, ChatGPT, and User Prompts : r/taxpros , that talks about how ChatGPT struggles with clearly seeing how the double-dip and triple-dip bonus depreciation deduction works. Lots of people initially confused. Also ChatGPT confused until your point to the examples in your prompt.
I believe the examples you're pointing to were altered by the changes to first year depreciation by TCJA and the defining factors of original use.
1.168(k)-2 updated (k)-1 ; and the example in both references assets before September 2017 and refer to new assets meeting the original use requirement; not used assets.
The TCJA changes to the requirements to be considered original use; or used but meet certain requirements prevents the carryover basis from being qualified for that requirement; and qualified to utilize additional first year bonus depreciation.
The carryover basis doesn't meet the used property acquisition requirements under 1.168-K-2(b)(3)(iii)
Specifically it no longer meets the "acquisition by purchase" piece defined in 1.179-4(c)(2)
"The reg cite for the bonus deprecation eligibility is Reg. §1.168(k)-1(f)(5)(iii)(A). (Tax guys or your tax guy may want this.)"
1.168(k)-2(g)(5)(iii)(A) - Adds the specific wording to state that if the asset meets the original use requirements carryover and excess basis qualify, If the property meets the used acquisition requirements then only the remaining excess basis qualifies.
IRS FAQ on Bonus :
"(a) the property was not used by the taxpayer or a predecessor at any time prior to such acquisition; (b) the property was not acquired from a related party or component member of a controlled group; (c) the taxpayer’s basis in the property is not determined in whole or in part by the seller’s or transferor’s adjusted basis in the property; (d) the taxpayer’s basis in the property is not determined under section 1014(a) or 1022, relating to property acquired from a decedent; and (e) the cost of the property does not include the basis of property determined by the reference to the basis of other property held at any time by the taxpayer"
Post: Real Estate Professional Status and SE tax
- Tax Strategist| National Tax Educator| Accepting New Clients
- Posts 3,748
- Votes 4,497
Quote from @Ken M.:
Quote from @Natalie Kolodij:
Quote from @Rohullah Sharifi:
If you are actively engaged in the real estate business—such as rental property ownership, real estate investment, and property management—and you meet the material participation test, your activities may qualify you as a real estate professional for tax purposes. In this situation, where there is no W-2 job or other earned income, the net income from real estate operations could be treated as subject to self-employment tax (FICA).
It is therefore essential to maintain accurate and detailed records documenting your level of participation, income, expenses, and management activities. Proper recordkeeping not only supports compliance with IRS requirements but also strengthens your position in the event of an audit.
This is unfortunately incorrect.
Real estate professional status does not subject someone to self employment tax.
SE Tax is is a separate code section under 1402 not 469. Whether a rental activity is subject to self-employment tax is dependent on the level of services provided in conjunction with the rental property, not if the taxpayer is a real estate professional or not.
Doesn't what your intentions are for the property, play a role?
If the intention is to buy property to re-sell it for profit then yes; we're looking more toward dealer status and SE tax. That's an ordinary business activity.
But if someone is just holding rentals; and not providing hotel-like services-
Them being a REP, flipping other houses, being a developer, being an agent etc....
Does not make the rents from those unrelated rentals subject to SE tax.
Post: Double-Dip and Triple-Dip Bonus Depreciation
- Tax Strategist| National Tax Educator| Accepting New Clients
- Posts 3,748
- Votes 4,497
My understanding is following a LKE only the excess basis in the replacement asset qualifies for Bonus depreciation; not any carry over basis. (Regardless of if the simplified reporting election is made or not)
Is that being taken into account for the example / suggestion here?
Post: Real Estate Professional Status and SE tax
- Tax Strategist| National Tax Educator| Accepting New Clients
- Posts 3,748
- Votes 4,497
Quote from @Rohullah Sharifi:
Quote from @Natalie Kolodij:
Quote from @Rohullah Sharifi:
If you are actively engaged in the real estate business—such as rental property ownership, real estate investment, and property management—and you meet the material participation test, your activities may qualify you as a real estate professional for tax purposes. In this situation, where there is no W-2 job or other earned income, the net income from real estate operations could be treated as subject to self-employment tax (FICA).
It is therefore essential to maintain accurate and detailed records documenting your level of participation, income, expenses, and management activities. Proper recordkeeping not only supports compliance with IRS requirements but also strengthens your position in the event of an audit.
This is unfortunately incorrect.
Real estate professional status does not subject someone to self employment tax.
SE Tax is is a separate code section under 1402 not 469. Whether a rental activity is subject to self-employment tax is dependent on the level of services provided in conjunction with the rental property, not if the taxpayer is a real estate professional or not.
no actively participate, main source of income, no w2 job, then, the income is active income and mostly get 1099, which is qualify for the SE taxes.
That is just not true.
It seems like you may be mixing together a few different concepts - but someone qualifying a a real estate professional under 469(c)(7) does not default their rental income to Ordinary income subject to SE tax.
Below is the tax code section on this -
https://www.law.cornell.edu/cfr/text/26/1.1402(a)-4
Post: Real Estate Professional Status and SE tax
- Tax Strategist| National Tax Educator| Accepting New Clients
- Posts 3,748
- Votes 4,497
Quote from @Rohullah Sharifi:
If you are actively engaged in the real estate business—such as rental property ownership, real estate investment, and property management—and you meet the material participation test, your activities may qualify you as a real estate professional for tax purposes. In this situation, where there is no W-2 job or other earned income, the net income from real estate operations could be treated as subject to self-employment tax (FICA).
It is therefore essential to maintain accurate and detailed records documenting your level of participation, income, expenses, and management activities. Proper recordkeeping not only supports compliance with IRS requirements but also strengthens your position in the event of an audit.
This is unfortunately incorrect.
Real estate professional status does not subject someone to self employment tax.
SE Tax is is a separate code section under 1402 not 469. Whether a rental activity is subject to self-employment tax is dependent on the level of services provided in conjunction with the rental property, not if the taxpayer is a real estate professional or not.
Post: Thank you, BiggerPockets! On to a New Chapter
- Tax Strategist| National Tax Educator| Accepting New Clients
- Posts 3,748
- Votes 4,497
It's been so amazing to be a part of this community with you- you've done amazing things for BP and I'm so excited it's letting you focus on your family in this next chapter!
Post: Paying $800/yr per LLC in CA for out of state rentals
- Tax Strategist| National Tax Educator| Accepting New Clients
- Posts 3,748
- Votes 4,497
I had a flight with a layover in LA last month and the joke was "great since I received a client email while I was here I'm now going to have to file a CA tax return this year".
California's tolerance for when a filing is required is pretty miniscule. Unless someone is providing a clear, cited reason why something wouldn't be required there....assume it is.
Post: How expense floating vinyl plank flooring in a rental?
- Tax Strategist| National Tax Educator| Accepting New Clients
- Posts 3,748
- Votes 4,497
Like Michael mentioned the actual reality of how longs things last vs. their depreciable lives are unfortunately unrelated.
Carpet and LVP fall under the same category of 5 year assets that aren't permanently affixed so you can put onto a shorter life and utilize accelerated depreciation methods.
Flooring like hardwood or tile would be 27.5 typically because it's pretty permanently affixed. You can't quickly and easily remove it without any residual damage, etc.
Also with the mention of talking to a few CPAs- If you were just reaching out and asking a question you may have just been getting the over simplified answer vs. if it was a CPA who was your CPA that you retained/paid to complete your tax strategy and preparation.