All Forum Posts by: Paul Sundin

@Ross Ellington

Assuming you are talking about residential real estate (homes, apartments), you are correct.  You would take a deduction of $9,090 on your taxes each year.

Generally speaking, when you actively conduct business activities or have “source” income in a specific state, that state will tax you. In most situations, you are required to file state income tax returns and pay tax on your respective share of income. It does not matter what state you reside in. In addition, taxpayers must generally report all their income (regardless of where it was earned) in their state of residency and pay income tax.

With both states taxing the source income, it would seem to give rise to double taxation. So to avoid any double taxation issues, the state of residency will typically provide a credit for taxes paid to the other source state. The result is the taxpayer may end up paying a tax rate that is comparable to the state with the highest tax rate.

When you consider the 50 states in the U.S., there are 43 that impose a state income tax. In these state you will typically be required to file, but in the 7 states with no income tax you will generally not have to file a tax return. It is important to note that some states do impose transfer taxes and other tax assessments.

Even though your question is broad, I can give you an overview of some deductions available to rental property investors.  

As a general rule, you can deduct any ordinary and necessary expenses in order to advertise, maintain and administer your rental property activities.  Here is a rundown of some of the basic types of expenses:

• Advertising expenses. Advertising expenses can include things like paying for newspaper or online for rent ads, paying for signs that say ‘for rent’ and even paying for an advertising company to promote your properties.
• Cleaning and maintenance costs. These costs could include the supplies you need to maintain or clean the property yourself or if you hire someone else to do the job for you.
• Commissions paid. If you use a real estate agent to manage your properties, then the commissions you pay to them are tax deductible.
• Depreciation (a non-cash expense)
• Insurance costs. Insurance costs can include property insurance or other types of insurance that are required for a rental property.
• HOA fees.This would include all fees and assessment.
• Interest.Specifically as it relates to mortgage loans secured by the property.
• Legal & professional fees. This can include attorney fees as well as court costs and fees related to inspections.
• Management fees. If you hire someone else to manage your property or rental activities then you can deduct the fees.
• Taxes. This would include property taxes and local rental taxes and assessments.
• Utilities.This would include water, sewer, electric and gas.

But there are also some overlooked deductions for rental properties that you may be able to claim. Some examples of these deductions include:

• Telephone and Internet. These would be services that you pay to either promote, manage or advertise your rental property.You may need to allocate the expenses between business and personal use.
• Office expenses.These would relate to your home office including stationary, office supplies and postage as long as they relate to your rental property.
• Local transportation expenses. This would include a mileage deduction that you would take to visit and maintain the property.
• Travel expenses. These expenses can have anything to do with travel, whether you needed to visit your rental property to check on deferred maintenance or if you just wanted to make sure that the parking lot was free from snow. You may also be able to deduct the travel costs associated with real estate conferences, courses and camps that you attend to further your knowledge.These expenses count as deductions, as long as they are not overly extravagant.
• Interest on credit card debt. As long as the interest is on balances that were derived from rental property activities it is deductible.
• Education and books. These are purchased to further your understanding of rental properties and property management.
• Equipment rentals. Could be for a copy machine or equipment used at a property.
• Professional dues. These are for investor groups or property associations.
• Accountant fees. Fees associated with tax advice and completing tax returns.
• Subscriptions. This includes magazines and newsletters having to do with real estate management or purchasing properties.

Hope this helps!

I have heard good things about it, but have not attended myself.  I know investors who actively invest in mobile parks as a result of the tax advantages.  Land improvements get a 15 year life versus 27.5 for residential real estate. 

I think they hold the seminars every month or two, so if you decide to hold off the next one will come around soon!

@Isaac Rowe

Thanks for the update! I have many clients (including foreign buyers) who are moving money from Arizona over to Ohio.  I don't know much about the area, except that it is a lot colder than AZ.  

There is no doubt that as a general rule flips are classified as ordinary income.  But the IRS will typically look to situations cited in related tax court cases.  The IRS looks closely at the “intent” of the taxpayer. Specifically, the following issues are often examined:

• Purpose for which the original acquisition was made
• Duration of ownership and the purpose for which it was sold
• Frequency and continuity of sales
• The extent to which improvements (if any) were made to the property
• Control and effort expended by the taxpayer in the sales process
• Use of real estate brokers and extent of advertising initiatives
• Ordinary business and experience of the taxpayer
• Nature of the taxpayer’s other real estate holdings
• Income from the sale compared to other sources of income and employment
• Reluctance or desire to dispose of the property

So considering the above criteria, one could look to see if the flip was intentional or unintentional. For example, a taxpayer may have one LLC (or an S-Corp) set up specifically for flips and another set up specifically for buy and holds. He may have purchased a property in the buy and hold LLC with the specific intent to hold it long term, but someone may have come along and made him an offer he couldn't refuse. Even though this may technically be a flip, it does not preclude him from considering capital gains treatment.

You have to understand that this is a very subjective area and each taxpayer's situation is unique.  Also, realize that if the flip is short term it will be taxed at ordinary income rates anyway, so we are just talking about saving employment taxes.  If the flips are going through an S-Corp then there is no employment taxes.  But there could be big savings if a taxpayer had a large capital loss carryover.

The key is to make sure that you discuss your situation with your CPA in advance of the transaction.  

Atlan - you of course need to understand the economics of any deal and the location.  But of course the legal and tax aspects are important.

There are a few US tax issues that foreign investors need to consider: (1) income tax; (2) estate tax; and (3) gift tax. Some of these tax issues are straightforward, but depending on your tax situation (and how many properties you are acquiring) there may be certain tax structures that you can implement that will make your investments more efficient. With proper planning, you can alleviate many of the concerns and sleep easy at night!

Make sure that you locate a good CPA who can assist with these issues.

The S-Corp structure will often help from a tax standpoint, but only if you are generating business income (like flips).  If you are just holding for rental income then it won't help you much.  Keep it simple at first and I agree that a good umbrella policy is a must!

Unrelated debt-financed income can be a big issue for IRA LLCs.  It is generally defined as any property held to produce income for which there is acquisition indebtedness at any time during the tax year. It also includes gains from the disposition of such property.

For example, if your self-directed IRA LLC buys a rental home for $160,000 with a 40,000 down payment and obtains a $120,000 loan to finance the purchase, approximately 75% of the income generated by the property would be subject to UDFI.

When the IRA LLC generates net profits in excess of $1,000 you would have to file a tax return. So make sure that you talk to your CPA before you use any debt financing.

There is no doubt that SDIRAs are very flexible options and allow for a diverse set of investments, including real estate. The problem is that there is often confusion about SDIRA tax rules. Compounding the issue is that the majority of CPAs don’t understand the complexity associated with them.

But even though an SDIRA can invest in most things, certain investments can trigger immediate tax concerns. The two main issues for SDIRAs relate to income from a trade or business that is regularly carried on (this can be directly or indirectly) or income generated from debt-financed property. These issues are identified herein as: (1) unrelated business taxable income (“UBTI”); and (2) unrelated debt-financed income (“UDFI”).  Many investors have heard of UBTI, but many are not aware of UDFI. 

What this means in practice is that if your self-directed IRA acquires a single family home for $200,000 with a 50,000 down payment and obtains a $150,000 loan to finance the purchase, approximately 75% of the income generated by the property would be subject to UDFI. The UDFI calculation is actually a little more complex. It is calculated as the percentage of average acquisition indebtedness for a tax year divided by the property's average adjusted basis for the year (average debt/average basis).

Anyway, just make sure that you understand some of the tax issues before you jump in!