All Forum Posts by: Ebere Okoye

Bottom Line: How you finance the property is completely separate from the tax treatment. You can have a financed second home treated as a rental because for IRS purposes, what matters is when you placed in service for rental and not how you purchased. Also, you also need to look at who bears all the burdens and benefits of the property and in this case, it's your rental that bears that now.

I cannot tell you if your CPA is correct or not but here is what I can say:

You absolutely can depreciate the Chicago rental in 2011 but prorated for the 6 months that it became a rental. so it will be depreciated over 27.5 years but since it is placed in service in 07/01/2011, you will only get about 1/2 a year's of depreciation. Also, you can absolutely depreciate or deduct the $15,000 and it is all attributed to the rental since the flood happened after it became a rental.

Bigger issue: Here is what I have investors read on how to determine the competence or incompetence of their CPA.
http://www.biggerpockets.com/blogs/2024-wealth-building-cpa?page=2

Here is the official IRS position on this
Real estate taxes. If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. You cannot deduct them as taxes.

If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. Do not include that amount in the basis of the property. If you did not reimburse the seller, you must reduce your basis by the amount of those taxes.

http://www.irs.gov/publications/p551/ar02.html

I set up solo 401(k)'s for my real estate investors all the time. If you contact me, I can give you some suggestions on how to title the investment. Here is a little write up from our FAQ section
Put offer together / contract

When putting offer together, as trustee of Solo 401k Plan, make sure to list your Solo 401k as the buyer. Remember that your Solo 401k is a separate investor from you, and therefore its name needs listed on all purchasing documents. If purchasing under tenant-in-common, make sure to reflect the Solo 401k's purchase portion separately. The Solo 401k's title should read as follows for example:

ABC Solo 401k Trust FBO Jane Do, Trustee

IMPORTANT: The regulations prohibit the assignment of a contract first drawn up solely in the name of the Solo 401k's Trustee to the Solo 401k account.

make a deposit / earnest deposit

When your self-employed 401k purchases property, your Solo 401k is required to fund any necessary deposit or earnest funds.

Closing

At closing, you,as trustee of the Solo 401k, will approve and sign all documents and then submit them to the closing agent along with check for purchase.

Vesting of all documents

ABC Solo 401k Trust F.B.O. Jane Doe, Trustee

Purchases should be transacted under Solo 401k's EIN:11-1234567

You can expense it but only up to the % that you allocate for business use. As for other deductible business expenses, it has to be necessary and ordinary in your kind of business and have a valid business purpose.

It all boils down to intent. If you intent is to buy, fix and flip then you are a dealer and cannot 1031 exchange. If your intent is Buy, hold but then decided to flip, then you can 1031 exchange and there is also a holding period requirement when next you want to sell the replacement property for another one. Most people usually recommend 12-18 months but if you are flipping within a short period of time, then you are a dealer and subject to S.E. tax. You could come up with an entity structure that minimizes not eliminated your Self Employment taxes

You can only use 1099's that apply to the year that the money was paid. I am not understanding why you need a 2012 1099 when we are in the 2011 tax season. Check online at filetaxes.com. You can file electronically there for only $4.58 and it's real simple. I am not sure about filing the 2012 1099 because it is way too early.

Well, this is actually a great idea and I usually tell my cleints that with careful planning you could come out on top. Point to consider.
If you are self employed, your income is not always stable so you could use the annualization method to reduce the amount of penalties you pay by showing that you earned your income in later months rather than the earlier months.

Also, there are also other tax reduction startegies like setting up a retirement plan and maybe with a SOLO 401(k), you can invest using the Solo money and not your regular income, this can also cut down your taxes.

You can also use entity structuring to do a hybrid ownership interest in an S corp or Multi-member LLC and thereby reduce your self employment tax which will ultimately reduce your penalties for paying late.

If you did decide to do an S corp, you can pay your salary in the 4th quarter and that;'s when all the payroll taxes will be due Jan 31st of the following year.

I hope these little tidbits help and no, it's not a dumb idea. It is a smart idea and you are looking for ways to make your money work for you.

Hi Steve,
I highly recommend Ola Odutola at www.Soteriatax.com (678)799-7861

You need to have lived in it 2 out of the last five years and if less, you can prorate the exclusion.

A key IRS rule is the holding period of the replacement property. Most experts recommend holding the property for two tax years before converting the property into a primary residence.