All Forum Posts by: Natalie Kolodij

Advertising alone won't qualify unfortunately. 

It definitely helps; but the IRS looks at other pieces as well including occupancy permits, extent of renovation, etc. It's when it's ready and available for rent. 

A normal turn around time of advertising while doing finishing touches, able to be occupied within next few weeks would be reasonable. 

Advertising at the beginning of a full studs out renovation or something that will be months down the line wouldn't work out. 

That's correct. 

Rentals as passive so if your AGI is over $150k you can't use the losses to offset your other income sources like your W2. 

You should be tracking every expense. It's a business. You want to report all valid income and expenses. 

When a passive loss is disallowed it carries to the next year. So you don't lose the benefit-you just don't get it right now. 

You will be able to use those disallowed passive losses: 

-Against other passive income 

-If this rental has net income in a later year these disallowed losses will offset that income

-When you sell a rental those carried over disallowed losses offset the gains on sale 


Other situations you hear about where people CAN use the rental losses to reduce W2 income are where the rentals qualify to be Non-Passive 

This typically happens in the following two situations: 

Real Estate Professional Status- A taxpayer or their spouse spends at least 750 during the year on real estate- and more time on it than anything else. (this is simplified but basically can't have a W2 job; must be FT real estate in some way)

Short Term Rental Loophole -If an average guest stay during the year is 7 days or less and you materially participate in the property it is by definition non-passive. 

With mid-term rentals if your average guest stay is 30 days or less but you provide substantial personal services (daily maid service, meals, shuttles etc, more like a hotel) then it would be non-passive...but you'd also pay self employment tax on any income as well. 

Just to confirm- does your wife have any other W2 job? 

And as others have mentioned existing passive activities do not become non-passive once REPS is achieved. 

They move into the bucket of a former passive activity- you can read more on it in code section §469(f). 

Many people end up making a grouping election to treat all rentals as one activity so that as a REP they don't have to meet MP in each property independently; this can also impact the treatment of those former PALs and how they apply, and what will free them up.  

From a tax POV it changes nothing. 

Sell it in your personal name; sell it from an LLC. Your write-offs and tax impact are exactly the same.

Lenders will typically add back depreciation, one-off large expenses, etc. 

The best way to confirm is to discuss with the lender exactly for their specific underwriting. 

You can either do this as 2 Schedule E's or one Schedule E: as long as the figures are the same. One schedule E is likely easier.

Two Schedule E: 

If all 4 units are the same size then you are going to have the following: 

Schedule E #1:  for 3 rental units that is allocated 75% of shared depreciation, expenses, etc. 

Schedule E #2: for your unit with your occupancy and the rental %. Only the 100% rental use spaces count. So square footage for only the bedroom you rent, and possibly a bathroom if they have exclusive access. So if it's a 1,000 square foot apartment and the rental bedroom and bath are 300 square foot you'd use 30% business use. 

For depreciation you'll set up your basis and use the county to figure building vs. land value. 

For the 3 unit schedule E enter that full amount and set the business % to 75%.

For the primary unit enter only 25% of the full amount- and set the business % to the 30% business use for your unit. 

1 Schedule E: 

If all 4 units are 1,000 square feet, and the rental space in your primary unit is 300 sq feet. 

You'd do one schedule E with a business use percentage of 3,300/4,000 or 83% 

You'd set up depreciation with the full amount of basis, and set business use to 83% 


The reason two Schedule E may be helpful down the road is if you plan to sell the property. 

When you a primary home that you've occupied 2/5 years you can exclude up to $250k tax-free if single ($500 if married). 

With your situation the gain from 3/4 units will be taxable. 

But the gain from your unit will not be. Even though you rented your spare bedroom in your unit. Rental space within your primary dwelling unit doesn't require a gain allocation. 

So when it comes to that point having it clearly separated to show some rental space was IN your primary unit could be helpful. 

Neither way is right or wrong, it should produce the same outcome tax wise if done correctly. 

Michael provided a great response above. 

Here's why double entry accounting matters. 

The way it works, and has since it was invented by Pacioli in the 1400s, is that everything is required to balance out (thus why every transaction has 2 entries). 

So it creates a system of checks in balances that as transactions are entered throughout the year both parts of it are accounted for. 

Like Michael mentioned if you are just reporting on schedule E/C on your personal return- a balance sheet isn't required; so full double entry software isn't required (but still helps). 

This is because we only need 1 side of the transaction -

Example: you spent $800 on repairs. We report an expense for $800 repairs. 

If you have a business filing (partnership 1065, S-Corp 1120S, etc) you'll need to track a balance sheet, and also equity as well. (This is what it sounds like you have since your CPA is having to create/track this year to year and effectively recreate it at year end. )

So now we need both sides of the transaction because those are what create those additional reporting requirements that tie in to a balance sheet: 

Example: You paid $800 on a repair for your rental 

Side 1: $800 repair expense 

Side 2: ??? 

a.Was it paid with a credit card? 

b.Was it paid from the rental bank account? 

c.Was it paid for by you personally? 

a. = your liability on the balance sheet for credit card payable would be higher by $800

b.= your assets on the balance sheet for the bank account would be lower by $800 

c.= your equity/contributions into business would be increased by $800 

So by switching from QBO to Stessa....you've removed the entire accounting component that says whether a,b, or c happened and your CPA is having to piece that together at the end of the year. And re-creating it and trying to tie it out is like a horrible game of where's waldo trying to find where the missing amounts are. 

Oh, also just a side note. If you are doing flips and rentals (depending on the income levels) you may want these in different entities anyway. 

But also Stessa isn't made to track flips- because a flip stays on the balance sheet until it's sold. It's inventory. 

As other mentioned it's ultimately on the business owner to track income/expenses. 1099s being issued are more a compliance piece on their end to ensure you're reporting income. 

Make sure you're reporting rents as your gross rents collected. 

Then separately you'd account for any fees paid for management, repairs management paid on your behalf etc 

If you bought land to build a rental on you will typically be capitalizing all of the costs until the rental is ready and in service.

 Just a word of caution on the algorithm based studies. A few colleagues have had clients audited for these studies now and they've been disallowed every time so far. 

Even when the company offers to back it with a full study if audited-the auditors are extremely aggressive on that study because it's kind of a  tainted the whole batch situation.