All Forum Posts by: Sim Xing
Sim Xing has started 2 posts and replied 7 times.
Post: Cost segregation for properties rented out against my will
- Posts 7
- Votes 1
Hello, I ran into a situation and I would like to ask for some advice.
I've purchased a property earlier this year as my primary residence, under California, SB1079. After purchasing the property, I have discovered that there is tenant living in it. They had a valid lease with previous owner and it took me seven months to get them out. In the seven months my tenants lived in my property, they paid rent. So my property was effectively rented out for the major majority of the year, even though my intention of purchasing, it was to live in it as my primary residence.
Under such circumstances, can I still cost segregation on this property and file my taxes as a rental?
Quote from @Sim Xing:
I'm curious about this too. I was reading somewhere that SB1079 doesn't apply to HOA foreclosures, but only to mortgage foreclosures. Has anyone know examples of post bidding actually worked on HOA foreclosures?
I'm curious about this too. I was reading somewhere that SB1079 doesn't apply to HOA foreclosures, but only to mortgage foreclosures. Has anyone know examples of post bidding actually worked on HOA foreclosures?
Quote from @Eric Williams:
Quote from @Sim Xing:
I am an real estate agent and investor in CA.
Me and my wife have bought a condo and used as our primary residence from 2016 to May 2021.
We rented the house out to tenants in May 2021.
In July 2022, we transferred title of the rental property to an LLC owned by me and my wife(50/50 partners).
In June 2023, we sold the property under the name of the LLC, and resulted a $400k capital gain.
My questions are follows:
1. Are we still qualified for Section 121 Exclusion even if the house was sold under our LLC's name?
2. My current CPA informed me that since the property was owned by the LLC for less than a year, the capital gains would be treated as ordinary income. Is that correct?
3. I will be qualified for Real Estate Professional Status this year, what can I do to minimize my tax liability for 2023?
Would love to get some advice on the situation by BP community
Thanks
This isn't a disregarded entity as there is more than one member. Disregarded entities refer to single member LLC's.
You basically have a partnership filing requirement.
Any 121 exclusion you are entitled to is reduced for nonqualified use during the 5 year period prior to transfer/exchange to the LLC.
You have a short term capital gain and possible recapture amounts.
Yeah this seems to have been botched.
Hey Eric, Thanks for replying to the post.
This is exactly where I'm so confused as every CPA has different opinions. What do you think of that @Michael Plaks replied above?
Quote from @Michael Plaks:
You are in CA which is a community property state. Normally your husband-wife LLC would be disregarded for tax purposes, meaning that the property is still treated as owned personally by you and your wife. In this case, you can still use Sec 121 exclusion. There will be some depreciation recapture tax, but it should not be too significant.
If your CPA already filed a 2022 partnership return for your LLC with the IRS (Form 1065), then it's a problem, and you might need a better CPA to look into fixing it.
Thank you Michael for the post. I am really getting mixed opinions on this exclusion as you mentioned. My opinion is I should fall under 26 CFR 1.121-1(c)(3) and husband and wife LLC is considered 'one owner'.
My CPA did file 2022 partnership on form 1065. Could you kindly elaborate how this is an issue? What can I do to fix it? Much appreciate it .
Quote from @Janet Behm:
The provision is primarily to benefit homeowners, as a primary residence.
The Feds engineered the Section 121 for home owners (2 of the last 5-years).
It is not 'friendly' to investors (LLC is a business entity).
So, you got hit twice (Actually three-times, because you missed the 1/2 Mill exclusion for a married couple)
1. It was owned by a business at the time of sale
2. You held it in the business for less than a year (looks like a flip to the IRS). You pay short-term capital gains (higher than holding it for a year or more and it would then be long-term gains at a lower rate).
This experience will benefit you for the rest of you REI career.
Sure hurts now!
Thanks for the reply Janet,
On point 2, do you think I can use my personal long-term capital losses(stocks) to absorb this gain? I was told somehow I am not allowed to.
I am an real estate agent and investor in CA.
Me and my wife have bought a condo and used as our primary residence from 2016 to May 2021.
We rented the house out to tenants in May 2021.
In July 2022, we transferred title of the rental property to an LLC owned by me and my wife(50/50 partners).
In June 2023, we sold the property under the name of the LLC, and resulted a $400k capital gain.
My questions are follows:
1. Are we still qualified for Section 121 Exclusion even if the house was sold under our LLC's name?
2. My current CPA informed me that since the property was owned by the LLC for less than a year, the capital gains would be treated as ordinary income. Is that correct?
3. I will be qualified for Real Estate Professional Status this year, what can I do to minimize my tax liability for 2023?
Would love to get some advice on the situation by BP community
Thanks