All Forum Posts by: Steven Hamilton II
Steven Hamilton II has started 25 posts and replied 5110 times.
Post: Classifying Spouse as Real Estate Professional
- Accountant, Enrolled Agent
- Grayslake, IL
- Posts 5,272
- Votes 2,325
Originally posted by @David C.:
@Lance Lvovsky thanks for all this advice. Looking at same in future for my wife. She’s a FT mom who may go back to work PT so was thinking that if she was more active in searching for deals, managing PMs, bookkeeping...that could easily be 750 hours/year (14.5 hours/week). Is it that simple? Does she then qualify as a RE professional?
As long as you can log more than the applicable 750 hour and spends more time in real estate than in anything else you should be good.
Post: BRRRR - Capital Gains on Excess Funds Borrowed Over Basis
- Accountant, Enrolled Agent
- Grayslake, IL
- Posts 5,272
- Votes 2,325
Originally posted by @Owen Dashner:
@Steven Hamilton II, thanks for your reply. Just to clarify, the parnership (LLC) that owns the property and takes out debt in excess of the purchase price and repair costs could potentially distribute the excess funds to each of the partners to use personally (for life expenses) without it creating a taxable event?
Basically, we are hoping to be able to buy a property at a substantial discount and be able to access the equity without selling the property and getting smoked on short term capital gains (we operate a flipping/wholesaling business as well and pay tons in taxes)...
That is correct; however, there is a potential that not all of the interest will be deductible. It would depend upon what you use the proceeds for. Here is actually a great article on the topic:
http://www.marcumllp.com/insights-news/tracing-of-interest-expense-related-to-debt-financed-distributions
Let me know if you have any follow up questions. I'm happy to give some feedback. I'm sorry you had to work with some individuals who did not fully understand the rules and regulations that are applicable to your situation. I understand it can be difficult to find quality information.
Post: BRRRR - Capital Gains on Excess Funds Borrowed Over Basis
- Accountant, Enrolled Agent
- Grayslake, IL
- Posts 5,272
- Votes 2,325
Actually it would be considered a debt financed distribution. If used for a project inside the entity it would just be interest traced to there next one. If it is outside the partnership we would also trace the use to determine if it is deductible.
The loan itself would have created basis for the partners. So it would not necessarily be in excess of basis.
I think you received mediocre advice. As a negative capital account for a partner does not mean distributions are in excess of basis. You'll find not information by looking up debt basis in a partnership.
Post: New Investor: Form LLC elect S Corp tax status?
- Accountant, Enrolled Agent
- Grayslake, IL
- Posts 5,272
- Votes 2,325
DO NOT use an S-corp for buy and hold. If anyone advises you to do so run.
Post: Being Discouraged by Family
- Accountant, Enrolled Agent
- Grayslake, IL
- Posts 5,272
- Votes 2,325
Originally posted by @Jeff Byrne:
So recently I've been incredibly excited about this new journey of REI. I've been looking at properties in the Indianapolis/Louisville markets and have found some places I'm interested in. No one in my family has any experience in REI and quite frankly have been very discouraging in their remarks about my goals. I'd love to start in a duplex/triplex/fourplex using house hacking, however when I tell family that I get looks like I'm crazy. Any hints/facts I can give family that would help them see the upside that is REI? Thanks!
Why does Family's opinion matter? Do what you need to do and let them be jealous of your success.
Post: recapture of depreciation in an IRA
- Accountant, Enrolled Agent
- Grayslake, IL
- Posts 5,272
- Votes 2,325
Originally posted by @Brian Eastman:
Either what you have been told is entirely wrong, or being taken very much out of context.
If your IRA owns rental property all cash, there are no taxes on the income, which all accrue to the IRA tax-sheltered. The same is true when the property is sold. The gain is tax-sheltered under the umbrella of the IRA.
When you do not pay taxes on income, you do not claim deductions against those non-existent taxes.
If, however, an IRA purchases property using debt-financing such as a mortgage, it is now going to create some taxable income. The portion of the income that the IRA receives based on the borrowed money is considered taxable as Unrelated Debt-Financed Income (UDFI). So in a 60% LTV environment, 60% of the income is taxable.
The IRA now has taxable income, and therefore gets to use the same fraction of allowable deductions. So you apply 60% of things like depreciation, interest on the note, property taxes, etc. to reduce the tax burden the IRA will pay on the UDFI. For most investors, the final tax amount on rental income is negligible - maybe costing .25-.5% of overall return on investment from the deal - which the use of leverage kicked upwards in a much higher degree.
If debt-financing is still in place when the property is sold then the gain on sale is also treated as UDFI and taxable. In the calculation for this capital gain, any depreciation used to offset UDFI on the operation of the property is then recaptured using the same logic as any other capital gain on the sale of real estate.
So, a leveraged real estate transaction gets a bit more complex and creates a small tax liability. This strategy is not for everyone. It can, however, really boost the return of your IRA through the benefits of leverage. I'll pay a few hundred dollars to my CPA and a few hundred to the IRS in order to magnify my returns by 30%.
The bottom line is that using an IRA to invest in real estate is not about tax efficiency as compared to investing in real estate with after-tax dollars. The same is true of any asset you may hold in your IRA, such as stocks, bonds, etc. The tax reality is just so entirely different. The reason that many investors choose to hold real estate in their IRA is because it is an asset class they know and understand, and can therefore produce better overall returns for the IRA than some other investment they may make with the IRA.
Perfect explanation
Post: How do you account for depreciation?
- Accountant, Enrolled Agent
- Grayslake, IL
- Posts 5,272
- Votes 2,325
Originally posted by @Rickey Davis:
Is it possible for your house to appreciate but still depreciate when it comes to filing taxes for your rental income?
As for your tax returns you are required to recognize the greater of the depreciation you actually took or could have taken when you sell. For this reason you should be depreciating your properties.
Post: Self Directed Retirement Plans
- Accountant, Enrolled Agent
- Grayslake, IL
- Posts 5,272
- Votes 2,325
Solo 401k is the way only to go in my opinion especially if you want to invest in syndications.
@Mark Nolan @Dmitriy Fomichenko Those are my two go to guys. They go on every referral for a solo 401k.
Post: RE Accounting/Tax Specialist/CPA
- Accountant, Enrolled Agent
- Grayslake, IL
- Posts 5,272
- Votes 2,325
Please note the above is just a warning to those who she is sending PMs to and those looking for qualified accountants
You definitely need someone qualified, does not have to be a CPA, could be an Enrolled Agent or an attorney or a non-credentialed preparer w. Just make sure they specialize in tax and have significant experience dealing with real estate investors.
Here is a great list of questions to ask a potential accountant:http://www.biggerpockets.com/f...
Also check out the National Association of Enrolled Agents page or National Association of Tax Professionals - Find A Member . It should help you find someone local. If someone comes to me, I'll send them your way.
So look for someone you can connect with that works out for your situation.
Feel free to ask here if you have questions
Post: RE Accounting/Tax Specialist/CPA
- Accountant, Enrolled Agent
- Grayslake, IL
- Posts 5,272
- Votes 2,325
@Natalie Kolodij thank you for the tag.
I actually stay quite busy with work fixing stuff from other preparers including some names on this forum.I too have CPAs as clients as they don't focus on tax. I know some great CPAs and some bad ones. It depends upon the individual. I also know some of the most knowledgeable individuals without credentials. Unfortunately congress has not passed laws that enable the regulation of preparers; however, some states have. @Melody E Bergloff, FYI Natalie is one I'd definitely hire to work for me. She can run circles around most.
Not everyone wants to do representation work and it can be a conflict of interest for an existing client. I'd recommend you check your responses and review them ahead of time. And frankly I don't know if you're qualified in any way shape or form.
Someone reliable should at least have a website. I'm not pointing fingers...
Don't mow down others until you have proved yourself. Because at this point I couldn't advise anyone to work with you as there is no information to find on you, no website, barely even a linkedin page where you jumped job to job. If you've had a practice for 9 years, but no website or other form of advertisement. Your recent posts of activity here seem more like spam to generate traffic to reach out to you privately. We have no testimonials etc. And you listed Utah as your location; however, your license was from CA. Didn't take long to Google.
Honestly if you have this much time to post there is some other problem. You should either be busy enough working for someone else right now or your practice should be busy enough with last minute premium work and not on here posting on every thread older than 3 months. You have not provided any information of value to this forum yet from what I've seen. All I have seen is posts suggesting a CPA.
I need to get back to tax returns as I actually have quite a busy practice and clients to work with.