All Forum Posts by: Nicholas Aiola

@Satyajit Bappanadu Manjunath I will respond to your PM.

@Anup Shah If you're in the business of lending, you would report income and expenses on Schedule C. 

@Priyanka K. Appliances and other assets pre-acquisition/pre-in-service date are typically included in the basis of the rental property unless a cost segregation study is performed. Assets placed in service post-acquisition/post-in-service date are classified into the IRS's pre-determined asset classes, each of which has its own useful life (read: how many years the asset's basis is depreciated over).

You can check out Publication 527 for more information on asset classes/lives.

Depending on the asset class and useful life, some assets are eligible for bonus depreciation, which is currently 100%. In other words, you can depreciate 100% of the basis of eligible assets in the year it is placed in service.

@Crystal Wilson 

@Linda Weygant is in the Denver area but I'd first like to align your expectations with reality (and I'm sure Linda would agree)...

First, the 2019 individual tax deadline is 7/15. I doubt any tax preparer would be able to take on a new client and file the returns before then this close to the deadline - you will likely have to file for an extension and complete the returns after 7/15.

Second, you cannot manipulate income/deductions on your tax returns to qualify for a loan. That would not only be a fraudulent tax return but mortgage fraud, too.

@Chinmay N. taxable income is gross rental income less expenses, including non-cash expenses like depreciation and mileage.

@Ricardo A Perez I'll try to consolidate some of the responses...

You do NOT pay tax on cash flow; you pay tax on taxable income. Cash flow almost never equals taxable income. The main contributor to this difference is depreciation. Depreciation expense is a non-cash deduction that reduces taxable income but does not reduce your cash flow. 

Residential real estate is depreciated over 27.5 years but it's much more complicated than taking the purchase price and dividing by 27.5. You have to factor in closing costs, break out the portion allocated to land since land is not depreciable, separate the loan costs and amortize them over the life of the loan, etc.

If the property is sold (absent a 1031 exchange), you will have to recapture the depreciation up to the amount you benefitted from the depreciation deductions while you held the property. This is called Unrecaptured Sec. 1250 Gain. This gain exists whether or not you actually deduct depreciation expense, so it's extremely important to calculate basis correctly, deduct depreciation each year, and calculate the unrecaptured Sec. 1250 gain correctly in the year of sale.

It can get complicated quickly but if you plan to DIY it, make sure your verify your source information.

@Stone Saathoff Because OP is specifically asking about a flip. The first sentence of your reply, which is your answer to his question, does not differentiate between rentals and flips. To the average reader, your response is confusing and misleading.

I'm sure your intent was to be helpful but as a CPA who specializes in working with real estate investors, my clarification was justified.

@Ujwal Velagapudi @Stone Saathoff

Profits from flips held for longer than one year are still taxed as ordinary income subject to self-employment. Gains from the sale of rental properties held for longer than one year are taxed at preferential long-term capital gains rates.

If you are in the business of flipping, you are a dealer in the eyes of the IRS and properties are considered inventory. The holding period is irrelevant.

Let this serve as a public caution to those who are not qualified to give tax advice on a public forum - we all want to make sure that those asking the questions receive relevant and correct information. 

@Jefferson Mcvicker You do not pay capital gains tax on a flip; you pay ordinary income tax plus self-employment tax at the federal level. And you pay ordinary income tax at the state (and local if the flip is in OH) level. Taxes on a flip could easily exceed 50% if you're not careful.

In either case, the income will be reported on your tax returns when you file, at which point taxes will be owed if you haven't already paid them in. But you may be required to pay in estimated taxes prior to filing your tax returns.

I'd recommend linking up with a CPA to ensure you have the right structure in place before getting started.

@Account Closed If it's a long story, I assume there are relevant details within it that will help determine the treatment of the disposal. Feel free to PM me to continue the conversation.