All Forum Posts by: Zachary Bohn

@Shamsul Chowdhury

Yes you will need to file a city income tax return(if inside the city limits) and an Ohio return. The good new is that Ohio has a small business deduction and you won’t owe any tax on the first $250,000 of business income. Even if you owed state tax on the Ohio income you would get a credit on your California income tax return for the amount paid to Ohio. 

@Ashish Acharya 

I don't believe the PAL offsets the gain from the sale. The gain from the sale is reported on Form 4797 with the net profit of $75k flowing to Schedule D. Then the PAL is release and becomes a deductible rental loss flowing to Schedule E. This example is even in the instructions for dispositions for Form 8582.

If you completely dispose of your entire interest in a passive activity or a former passive activity, you may have to report net income or loss and prior year unallowed losses from the activity. All the net income and losses are reported on the forms and schedules normally used. (From the instructions. PALs flow through Schedule E)

The overall income in the year of the sale would be $55k but the character would be:

$75k of 1231 Gain which flows to Schedule D. $25 of which is unrecaptured 1250 and will be reported on line 19 of Schedule D. So $50k will still be taxed at capital gains rates. 

$20k of PAL carryover will be released and taken on Schedule E as a deductible rental loss for an ordinary deduction

@Ryan McEnroe in Ohio the tax is based on the 35% of the total value. Usually the main reason there is a difference is that the property really hasn't been reassesed and has just had incrememntal increases until there is another sale

@Aaron Moayed yes income would be irrelevant at time of sale if you sell the property that created the PALs and are released as ordinary deduction, even if you make more than $150k.

If the PAL is in excess of your income then there would be an NOL that gets carryforward. 

@Aaron Moayed 

If you make over $150k then you are completely phased out and can't take a deduction for losses in that year and are carried forward until there is income or the property is sold.

If you are under $100k then the loss is deductible up to $25k. 

For every $2 above $100k you lose the ability to take $1 of the deduction in the current year. So for $100,010 you could take a deduction up to $24,995. 

When the property sells any PAL is freed and it is taken as a current deduction. Obviously that would only apply if you were unable to deduct losses in the prior years. 

In your example of a $150,000 sales price and the basis info from @Eamonn McElroy of $75k net book value you would have the following items on your return. 

Recapture of $25k of 1250 depreciation

The remaining $50k would be 1231 gain subject to capital gain rates. 

Then your $20k of PAL would be freed and you would take a $20k loss on Schedule E. This does not directly lower 1231 gains. 

When a property sells the PAL is freed and your overall income doesn't matter. 

I'm a CPA and was just in a hurry earlier. I figured he would've responded by now. 

@Aaron Moayed you wouldn’t want to offset 1231 gains. Instead you are getting an ordinary deduction from the PAL deduction. You net out to the same income overall

Your way gets to $30,000 of 1231 gain

Mine gets a $20,000 ordinary deduction and $50,000 at 1231 gain for a net increase to income of $30,000

@Aaron Moayed if the sales price was $150,000 then the the 1250 gain would be $25,000, the 1231 gain would be $50,000, and the PAL would be $20,000 ordinary loss. It wouldn't offset the 1231 gain, which is beneficial because you get an ordinary loss for the release of the PAL instead of lowering capital gain. 

@Eamonn McElroy correct me if I'm wrong, it's been a long day

@Anthony Garcia are you located in Houston or will this be an investment out of your area? 

@Anthony Garcia generally vacancy expense is calculated to give cushion when calculating if the property will cash flow. Most people set aside the cash just so they aren't getting hit with things at once.

Where are you looking to start investing at?

@Kyle McAlpin

1. With a single member LLC it is just treated as a member draw and there is nothing that needs be reported. A SMLLC is treated as a disregarded entity for tax purposes unless you've made elections to be treated as something else.

1a. You can take the distributions at any time.

2. Generally it is best to have a trail and show the money out of one to you personally, then you personally contributing to the other. 

3. Nothing would change tax wise if you were to restructure like that because the Wyoming LLC would still be a single member LLC that would be disregarded. Everything should flow from the other LLCs to the Wyoming LLC bank account then to you though.