All Forum Posts by: Zachary Bohn

What exactly was wrong with the depreciation your prior accountant was taking? I

@Lucas A Riemens As @Natalie Kolodij mentioned the properties all being in separate LLCs can be a PITA. It can be slightly easier if you have a holding company LLC owning all the other LLCs so that you only have one additional return to worry about. If both you and your wife are the members of the LLC then you need to be filing a partnership return for each LLC since Ohio isn't a community property state.

@Lucas A Riemens You can't really structure expenses to change tax benefits, with the exception of maybe when you pay for an item. The ability to deduct or need to capitalize depends on the expense. At a minimum you need to keep track of the expenses by property and unit. Is each LLC owned you and your wife?

@Mike H. when you sell a property there isn't really a way to only pay capital gains tax and avoid recapture. You pretty much have to bite the bullet, unless there is some reasoning behind allocating a larger sale price to the land portion. There are still requirements that you have to hit to qualify as a real estate professional according to the IRS, and you want to make sure you evaluate all of the criteria since this is generally an area that gets people audited. 

You also need to look at the implication of becoming a real estate professional. That is only half the battle. Then you have to have material participation in an activity to not be subject to the limitations. If you have to make a grouping election to satisfy the material participation test, then that can impact your ability to deduct the suspended losses. If you have suspended losses now and then the activities become nonpassive the suspended losses can only offset the current year income from that activity and the remainder is treated as suspended losses still. 

@Mike H. Correct, unless you are taxed as a C-Corp, which generally isn't suggested for businesses that are holding appreciating assets. If everything is in a partnership, SMLLC or S-Corp everything is passed through to the owners with the same character. Rental income would come through on a K-1 separately from the fliping activity.

For the real estate professional you have to look at the overall facts and circumstances, it will be based on the individual. It isn't based only on the activity of the company. You would count hours spent on the activity of the company but it is still based on the individual. 

If you sell property you won't have just capital gains but you'll also have depreciation recapture that will be taxed at ordinary rates(with a max of 25%). To be classified as a capital asset you have to hold it more than one year.

@Mike H. by putting them under the same entity wouldn't change the outcome unless you were considered a "dealer". Rental income is passive and can only offset passive income generally. If your income is below $100k you can deduct up to $25k in rental losses, but lose $1 of possible deduction for every $2 you income is above $100k so no deduction after your income is $150k. Flipping income is active income and you wouildn't be able to offset the flipping income directly. You'd only be able to offset if you met the circumstance above or were considered a real estat professional.

@John Woodrich you right it could potentially hurt the seller, but not often since most sales don't have an allocation for the personal property and that depreciation is about the only one that would get recaptured in the year of the sale. Your assessment that all 1250 depreciation(which is how I stated in my original post) would be recaptured in the first year is still incorrect. There is still a general tax advantage to the seller since this allows the income to be spread out, unless the seller would be in the highest brackets annually. 

@John Woodrich 

@Nicholas Aiola

Form 6252 instructions for Line 12(Ordinary income recapture) only includes depreciation from line 31 of Form 4797 which would be $0 in the case of MACRS real property. If you have a different analysis please let me know.

@Tanner K. There can be significant savings for a seller financing the deal, depending on the other remaining income items they have.  For someone who is always in the top tax brackets and that will continue going forward it may not be as advantageous. But with proper planning it can be a great tool to avoid paying for a large tax hit in one year

@John Woodrich and @Nicholas Aiola your assesment is incorrect. If the seller elects the installment sale method, and the property has been depreciated under MACRS for the 27.5 or 39 year life then the total unrecaptured 1250 depreciation is allocated as principal payments are collected. The only 1250 recapture that is picked up in the year of the sale is if you used an accelerated depreciation method. If you carefully read through the instructions for Schedule D, Form 4797 and Form 6262 my method is correct. 

Zachary Bohn, CPA

@Tanner K. With seller financing the seller only picks up the gain as they collect principal. Any sales price for the personal property (things like appliances) is picked up as income in the year of the sale. Lets assume the following:

Sales Price $500k

Original Cost $300k

1250 Depreciation Taken $100k

Adjusted Basis $200k

There would be a $300k gain 60% profit

As principal is collected the payments are split between return of capital, capital gain and unrecaptured 1250 depreciation. Year 1 seller collects $100k in principal payments. The amounts reported would be $$60k long term capital gain with $20k being unrecaptured 1250 depreciation, and $40k return of basis. The seller would also report all of the interest income received for the payments. 

Overall seller financing allows the seller to spread out the income to potentially take more advantage of lower rates since all of the income isn't included in one year, and they end up with more cash since they get interest payments as well