All Forum Posts by: Nicholas Aiola

@Jeff White Of course!

Ordinary/operating expenses cannot be used to directly offset capital gains, unfortunately.

Expensed vs. capitalized depends on a lot of things, actually. In the rehab stage, mostly everything will be capitalized because the property is not yet "in service". Once placed in service, you can start expensing normal operating expenses.  Until then, you're very limited and more or less stuck with capitalizing & depreciating. Generally, any improvements should be capitalized; repairs/installments and new equipment/furniture over $2,500 should be capitalized; the first $5,000 of "start-up" costs can be expensed (depending on the total cost of all start-up expenses), and the rest would be amortized over 15 years.

Those are just some examples. Hopefully, this helps!

@Mark S. That's totally up to you guys. Your friend could have 0% ownership, but 50% entitlement to income & losses. No ownership needs to be changed.

@Mark S. You would have to obtain an EIN for the partnership and file Form 1065.

@Jay Taneja To answer your questions:

1. Incorporating into an LLC would not change the new pass-through rules; they apply to unincorporated pass-through entities, too. Property taxes for the rental portion would still be 100% deductible. In your case, this means 50% of the property taxes will be fully deductible against rental income and the other 50% would be subject to the $10k cap.
   
2. It depends on if the LLC has only one or more than one owners. If it's transferred to a single-member LLC, the IRS recognizes it as still being owned by the individual (see Regulations section 1.121-1(c)(3)). A transfer to a multi-member LLC would constitute a transfer of ownership and would make you ineligible for the home sale tax exclusion.

@Mark S. If that's your agreement, then you would do exactly that for tax purposes. Since you are the sole owner, you and your friend cannot elect out of filing a partnership return (see Regulations section 1.761-2). Therefore, a partnership return (Form 1065) should be filed, which will generate a K-1 for each of you.

@Mark S. Just to be clear, your friend is not on the deed, correct? Is your friend on the mortgage?

Technically, it depends on the structure of the partnership and what your agreement is with each other. I would strongly suggest speaking to an attorney about setting up an LLC along with an Operating Agreement which will detail ownership percentages and allocation of income and losses (not to mention for asset protection).

@Joe Splitrock You are correct - the new tax bill is eliminating the deductibility of HELOC interest (unless the funds are used to repair your home).

I haven't seen any specific mention about how to treat interest on HELOC funds used to purchase an investment property. Theoretically, the deduction should follow the use of the money (this is hard for the IRS to track, by the way), but I can't say for sure just yet.

If I come across anything specifically, I'll be sure to update this reply!

@Eileen Loh This topic is better suited for an attorney. I'm not sure about the Homestead Exemption laws in your state in regard to multi-family properties, and I wouldn't be able to advise on asset protection strategies.

From an accounting perspective, if the property is in the name of the LLC, all expenses related to the rental unit and common area(s) should be paid out of the LLC bank account. If you are paying for repairs, maintenance, or other work to your unit only, then it would be okay to use your personal funds.

@Matt D'Arco 100% bonus depreciation means you can depreciate 100% of the cost of qualified property in the year of purchase. For example, let's say you bought qualified property with a useful life of 5 years for $5,000. If there was no bonus depreciation, you'd depreciate $1,000/year. With 100% bonus depreciation, you'd be able to write off the full $5,000 in the year of purchase.

Self-employment taxes appear to be unchanged, but you may be entitled to a special deduction allowed to pass-through income. This depends on your income level and whether or not a real estate agent is considered a "service" business, among other factors.

@Tiago Martins You're very welcome!