All Forum Posts by: Natalie Kolodij

You should have talked to your accountant before selling. 

Selling a primary home is typically tax-free. 

Selling a business asset isn't. As mentioned above space within your primary dwelling is included...but you had a separate building/dwelling unit that you only ever used for business use. (Rental or a Business office that created a tax write off for you)

That would have qualified for a 1031 exchange if it had been setup prior to being sold. 

If the square footage of that ADU was about 30% of the combined Sq footage of the house+ADU then that would be correct. 30% of your gain would be taxable.

Unfortunately at this point there isn't a ton that can be done. 

Talk to your accountant see if anything can be done to lower your 2022 AGI still (funding retirement accounts) which would reduce your gain rate. 

Just to confirm...

You occupied it FIRST then rented for a year? 

There was no rental use BEFORE you moved into it right? 

If so, then your CPA is 10000% wrong. It's 2 of the last 5 years period. 

So you can live in a home for 2, rent it for up to 3 and still sell tax free (except depreciation recapture)

He's calculating it like non-qualifeid use 

Which would be the case if it was a rental for like...8 years...then you moved into it for 2. Those initial 8 years woudln't qualify as tax free so only 20% of your gain would. 

Just here to add a few comments: 

1. Depreciation isn't optional. So you have to take it either way. Otherwise when you sell you're still taxed as though you did - and you ALSO didn't get the benefit. 

2. Even if you can't utilize losses created by depreciation this year you can use them eventually. Most typically, when you sell the asset. So if you have a $10k annual loss you can't offset w2 income with...and sell the rental after owning 10 years...thats $100k of losses you get to use to reduce your gain when you sell it. 

3. It does re-set when a taxable event (sale). So If you own a property for 20 of the 27.5 years and sell it to a new owner...that new owner gets to start over with a new 27.5 year life cycle at the price they paid. 

4. Many people have income under $100k (allow losses of $25k a year), have Short-Term rentals which are often passive and allow losses, or they or their spouse qualify as a RE professional which would allow large amounts of rental losses (typically generated by accelerated deprecaition) to offset their other income sources. 

I got a nasty Dm as well 

"Oh , so as a moderator you can block other people's view of my post so you cannot be contested..."

I didn't block or remove any thing. Post is still here. Not sure why his account is closed - Moderators can't close an entire account, only edit posts and leave notes regarding rules being broken. 

Multiple tax professionals tried to explain the original CPA's concern further  but no dice. 

So I wish you the best and hope you find the input/answers you're in search of. 

 

You are right...you are not a tax professional.  I  didn't say beforeit was RENTED. I specifically said before a property is in service. 

What you posted literally defines what I told you. In service is by definiton "ready and available for rent".  It's what linda explained as well that you asserted she was making up. 


In service date is when the property is both ready and available for rent. So all of your costs to get it ready for it's intended use are capitalized. 

So if you buy a house that you need to put $10k of work into before it's in the condition for it's intended use as a rental...that is costs incurred before it is pre-in service. It is not "ready" to rent until those renovations are done and you haev a C/O or permit sign offs ect. 



There are IRC sections that pertain to asset basis, there is Pub guidance, lots of court cases on the topic. 

IRC 167

Pub 527

https://www.thetaxadviser.com/...

https://nbaa.org/wp-content/up...

There is no such thing as rental repairs before a rental is in service. Period. 

This is like having operating expenses on a business before the doors are open to the public. It doesn't exist. 

To the IRS all costs to get any Asset ready for it's intended use are added to it's basis/ capitalized. 

I didn't have a chance to read through it all- but Linda knows her stuff and I'm guessing this is the point she already made. 

The repairs vs. deminumus vs. capitalized tests all come into service one an asset is in service. 

If you generated a bunch of losses with pre-in service expenses then those were incorrectly accounted for, and should be improvements/basis items. 

Almost no one has only passive income.

If married and one person has a w2 and the other has REPS their losses become non-passive and can now reduce their partners's w2 earnings. 

A real estaet agent who makes $300k a year can also generate a $300k loss from rentals and net the two together. 

A doctor earning $300k a year who generatesa  $300k rental loss can not offset any of their doctor income from the rental losses. 

The benefit is this: 

If you're not REPS and your rentals have losses but you earn over $150k a year your rnetal losses can't reduce any of that other income. 

If you are REPS the rental losses can offset all of your other income, even if you make over $150k. 

Ooofffff ......

It's like she's so wrong she almost has it right haha 

So the ironic part is- you likely qualify for them to be non-passive becuase it's < 7 days, material participation is likely ect. 

But STR are 39 years-they don't meet the definition of a residential rental proeprty for 27.5 years.

And IRC 469 has the defining factors between passive an non passive losses for a reason. Just saying becuase your "business" is real estate doesn't make these losses deductible magically. That's why real estate professional status exists and has very strict defining factors to it. 

I would recommend working with someone who is real estate specialized. Based on how she is doing things this would NOT be defendable in audit. It's pretty critical the tax professional understand the actual strategies and legalities around what they're doing...and isn't just...going with a feeling.

If you materially participate as well then the losses are deductible. 

Schedule E. 

Only on C if you provide sub services, only SE tax if Sub services (reported on C)

There won't be excess loss leftover for year 2 most likely- 

Having it be non-passive removes the loss limit. 

So if you use cost seg + bonus to create a $50k loss year 1, you get a write off aginast your income that year in full. 

Year two you can convert it to a LTR without any type of"pay back" or such