All Forum Posts by: Natalie Kolodij

This is correct. 

The best way to think about it is you're in the business of renting a property-that business isn't operational until it's ready and available for rent (aka in service). 

So you don't have a business yet, and current deductions yet. 

Also -without an in service rental, you have no schedule on your tax return on which to deduct those expenses. 

Additionally, most of the costs to make an asset ready for it's intended business use are capitalized and part of the cost of the asset. 

Example: If a business buys an oven and it costs $5,000, and $1,000 for installation and setup, and $200 of delivery and transport fee. 

The business would have an asset it was able to depreciate in the amount of $6,200. 

As the tax code is concerned all of the costs to create your rental property business (buying it and making it usable for it's intended use) and one in the same. 

Keep track of those costs this year, they come into play in 2025 when it's in service. Some costs MAY qualify as startup costs if the rental rises to a qualifying trade or business level under 195 as well. (more legal fees, business fees vs. renovations).

Research Points: 
§1.263A-1T
§195(c)(1)





Ervin E. Mears v. Commissioner, (Tax Ct. 2013)

 

Short Answer is yes, via interest tracing rules. 

Loan interest is deductible based on the use of the loan, not the asset securing the loan. 

That said there are some nuances and requirements to property implement interest tracing so ensure you talk to your tax professional ahead of time and keep the funds movement as clean as possible. 

Research Point - 
§1.163-8T 

This is a long revived post- 

I'll add a little tax pro insight from what's happened in the last 2 years 

The IRS went from < 100 engineers on staff who were qualified to audit cost segregations to a few hundred. 

I have been able to review or been told of several audits (from other REI tax colleagues) related to cost segs in the last year or so- and of those none of DIY cost segs were allowed under audit.

Quote from @David Cherkowsky:

@Basit Siddiqi

@Andrew Strauss

@Katie Ripp

I received the following response:

"The more active income you earn, the less you can deduct from your rental property due to the phaseout of the Passive Activity Loss deduction. As your Modified Adjusted Gross Income (MAGI) increases, the amount of rental losses you can offset against your ordinary income phases out. However, a Partnership LLC can allow you to deduct 100% of your rental property losses, regardless of your MAGI. This is because losses in a Partnership LLC are generally considered passive or non-passive depending on your involvement, and the structure of the LLC can provide more flexibility in how losses are handled."

Does this sound right?

This is definitely not correct. 

The entity doesn't change the nature of the income to you. 



You said you found this tax professional on BP-was this through the "Tax Pro Finder" or was this someone you just reached out to? Please shoot me a DM -Moderator request 

Quote from @Kole Kingslien:

@Natalie Kolodij

I am also on the hunt for a Real Estate CPA for Tax prep, planning, and filing. Any contacts you might have would be greatly appreciated!

 We will be accepting new clients next month for 2025 year.

This post was all over. I didn't get to deep dive. 

Putting assetings into a partnership doesn't create gain typically- creates adjustments related to inside/outside basis. 

A spousal LLC can only be diregarded in a community prop state.

Putting appreciated assets into an S corp can trigger gain. 

Rentals should almost never be in S corporiations. 

If the current CPA is who advised this go elsewhere. 

This was not great advice on the part of your CPA. 

I'd recommend working with someone who understands REI.

An LLC doesn't change things, self rentals have specific implications as well.

What typeof loans are on the properties?

I would suggest binging the BP Money podcast. 

If your work offers any type of account matching start there. 

If your income allows it contirbute to a Roth IRA.

If your plan allows contirbute to a HSA.

If you work with an accountant they can provide a very accurate projection for you. 

It can be a little bit of a circular calculation because of how the brackets work. 

Also if it's from selling REI any passive carryover losses you have can offset the gain as well.