All Forum Posts by: Paul Allen

Welcome to Bigger Pockets!

Any answer to your question that could be typed into a forum post would be incomplete. This is a huge topic! Many books are written about it. Here are a few suggestions/tidbits/points to ponder to guide your further research.

Avoiding taxes is a worthwhile goal, but pursuing an investment only for the tax benefits is usually a recipe for unhappiness. 

How did you plan to invest in real estate? Were you planning to buy residential or commercial property and rent it? Are you looking to buy property, rehab it, and then resell it for a profit? There are different tax implications for those different ways to invest.

You may want to consider reading the Bigger Pockets Book Tax Strategies for the Savvy Real Estate Investor for some ideas. Then go see a tax professional who is knowledgeable in real estate investing and talk about strategies you are considering to see how they fit into your specific situation. Everyone's situation is unique, insist on unique recommendations for yours.

Best of Luck with Your Real Estate Investing!

You are fine for IRS purposes.

The dates at this point will be important, and it looks like the clock is ticking. In order to qualify for the Section 121 exclusion of capital gains you need to have used the house as your primary residence for 2 of the past 5 years. (As with everything with tax laws there are exceptions and modifications to that rule.)

Not sure what "I didn't file anything until 2016" actually means, and that could be important. The basis of real property used as a rental is required to be adjusted for depreciation 'allowed or allowable'. If the property is sold for more than the adjusted basis there will be unrecaptured section 1250 gain (depreciation recapture), and the section 121 exclusion will not get you out of that tax.

Highly recommend you talk to a tax professional familiar with real estate issues and get all the facts on your specific situation before you make a decision on selling.

Best of Luck on Your Real Estate Investing!

@Amelia Goodyear

1. She can file a form 709 to use part of her lifetime exclusion to avoid paying taxes on the gift to you. HOWEVER...

It's only a gift if your mother's name is not on the title. If her name is on the title (you can own the property jointly) then she is a co-owner, and there is no gift. Based on the facts provided this seems like a course of action more in line with what your mother wants...because her heirs would get a step up in basis on her portion of the property when she passes - which is a really good tax benefit. You should sit down with a tax pro to work on all the specifics of your situation.

2. No.

3. You'll need an attorney for that one!

Best of Luck!

The bank issued the card without the EIN, so it isn't illegal.

For whom are you concerned it might it be an issue?

You will never possess what you choose not to pursue.

Still round the corner there may wait; A new road or a secret gate; And though I oft have passed them by; A day will come at last when I; Shall take the hidden paths that run; West of the Moon and East of the Sun

Not all those who wander are lost...

It matters not how strait the gate; how charged with punishments the scroll; I am the master of my fate; I am the captain of my soul.

Last I checked the IRS has no hard and fast rules on whether you are classified as an investor (buy & hold) or a dealer (flipper).  The courts have come up with a 15-point checklist to determine your 'intent'. (The courts settle the disputes that arise when the IRS classifies someone as a dealer and they want to be an investor.)

• Taxpayer's purpose for acquiring, holding and selling the property
• Number, frequency and continuity of sales
• Duration of ownership
• Time and effort expended by the taxpayer in promoting sales
• Taxpayer's use of brokers
• Extent of improvements and subdivision made to facilitate sales
• Ordinary business of the taxpayer
• Extent and value of the taxpayer's real estate holdings
• Extent and nature of the transactions involved
• Amount of income from sales as compared with the taxpayer's other sources of income
• Taxpayer's desire to liquidate landholdings unexpectedly obtained
• Taxpayer's overall reluctance to sell the property
• Amount of advertising
• Use of a business office for sales
• Taxpayer's control over any sales representatives

Rental properties do have tax benefits, but you can't realize them until the year you sell the property. Your losses aren't 'disallowed' they are SUSPENDED.

However, your strategy seems to be to buy a rental property that loses money so you can write the losses off against your W2 income. If you just want to lose money and you don't care where the money goes, there are more efficient ways to reduce your taxable income. Why not give it to a charity?

When you flip real estate you realize income on the sale of the property, and that gets taxed at ordinary income tax rates. Income from flipping is also subject to self-employment taxes.

When you BRRRR you do not sell the property, you rent it. If you have rental income (after expenses) your rental income is also taxed at ordinary income tax rates, but it is not subject to self-employment taxes.

Money the bank loans you on a refi is borrowed money. Borrowed money is not taxable as income. 

Best of Luck on your Real Estate Investing!

You created a second business when you invested in rental properties. Whether you create another entity (such as an LLC) to contain that business is up to you.

You can take your profits from your rental business and use them to invest in your IT business. Just keep a good paper trail for those transfers.

I don't see any benefit to having your IT business own your rental property. That just adds to the liability risk of both activities, and I don't see any reward for taking that risk. Am I missing something?