All Forum Posts by: Account Closed

I own two properties in Tennessee. The first property is a condo, and my wife and I own 90% of it, and my brother-in-law owns 10%. The condo was purchased March 2019. We lived there until September 2021. In September 2021, my wife and I moved overseas and, we are still living abroad. My brother-in-law has remained living in the condo the entire time (not sure if this is important). I need to know if we would receive a tax break if we sold the condo before the end of this year. Our intention would be to roll the money from that sale directly into our second-home property. I recently discovered the 2 out of 5 year rule where you must live in the property for two out of the last five years in order to get a tax break. I would like to speak to a tax professional regarding this situation in Tennessee. Our primary address according to our 2021 tax return is the property in question (even though we technically moved in September 2021). Has anyone done this before?

Thanks!

-Alex

Hey Alex,

You’re on the right track with the 2 out of 5 year rule. Since you lived in the condo until September 2021, you could be eligible to exclude up to $500,000 of capital gains (as a married couple) if you sell before September 2024. The fact that your brother-in-law owns 10% shouldn’t affect your ability to claim the exclusion on your 90% share. However, rolling the proceeds into your second home won’t provide any tax benefits like a 1031 exchange, as that only applies to investment properties. That shouldn't matter though as it sounds like this should be a tax free gain for you. Best of luck!

1 Vote

Quote from @Heidi Cousineau:

Hi there!

My friend and I just bought a STR together. We also have our own respective small businesses. I am looking for a tax pro who can help us strategize and set up our business for success. Having trouble finding someone good on the Tax Pro finder here. Anyone have any suggestions or recommendations?

hey Heidi,
As accountants, we cannot promote our services as its against the BP rules here on the forum. I would suggest reaching out to folks who are providing value and asking if they are taking on clients. Best of luck!

0 Votes

Quote from @Yi Chu:

If I invest a multifamily through a Roth IRA, will I still receive the same tax benefits as I would with personal cash when I file my tax return? Will I lose depreciation deductions if I use Roth IRA fund?

Hey Yi,

If you invest in a multifamily property through a Roth IRA, you will not receive the same tax benefits as you would with personal cash, such as depreciation deductions. Roth IRAs offer tax-free growth, meaning that rental income, appreciation, and gains generated within the account are not taxed, but you cannot take advantage of deductions like depreciation or mortgage interest on your personal tax return. The Roth IRA itself shelters the investment from taxes, so while you lose direct tax deductions, your profits grow tax-free and can be withdrawn tax-free in retirement.

1 Vote

Quote from @Scott K.:

Hi there, when my family and I travel, we simultaneously use that trip to look at potential investment properties. I was wondering, are any of those travel expenses tax deductible?

Hey Scott, any expenses that are ordinary and necessary to business activity can be expensed. As for you specifically most likely yes but its not that strait forward as @Kory Reynolds points out

0 Votes

Quote from @Cindy Auch:

Wanting to understand how the interest part of our income (partnership LLC) for short term loans- mostly fix & flips, are considered for tax. One accountant said it's not subject to self employment tax since it's considered passive (but origination fees and other loan income fees are subject to it. Another accountant said it's ordinary income subject to SE tax since we're a partnership LLC. Also anyone have insight on excess taxable income regarding the above and private lenders? Thanks

Hello Cindy!

As others have pointed out, interest income from a partnership can be classified as either "portfolio income" or "ordinary business income," depending on factors such as the nature of the partnership’s activities, the number of loans, and whether the interest is incidental to your main business or a core activity. Portfolio income, reported on Line 5 of the partnership’s K-1, is not subject to self-employment (SE) tax. However, if the interest is considered ordinary business income, it is reported on Line 1 of the K-1, and SE tax may apply based on your material participation in the business. If you are actively involved in running the business, originating loans, and spending significant time managing it, you may be considered materially participating, which subjects you to SE tax. Origination fees and other similar fees are typically treated as active income and are subject to SE tax. Key factors in determining the classification include the volume of loans, the partnership’s intent, and the loan values.

To prevent interest from being subject to SE tax and keep it classified as portfolio income, you can limit your level of active involvement and ensure the interest is incidental to your business, rather than the primary focus.

2 Votes

Quote from @Daniel Loane:

Thanks everyone, very grateful for the community and the great info you shared with me! @Sean Graham @Account Closed

Happy to help!

0 Votes

Cleveland, Ohio

Quote from @Nick O.:

Quote from @Account Closed:

Hey Nick,

1. Yes, you can take advantage of bonus depreciation when you partner, typically through a simple LLC or partnership agreement. In a 50/50 partnership, each partner generally receives 50% of the tax benefits. However, if you are pursuing Short-Term Rentals (STRs), each partner must qualify individually for "material participation," which can be more challenging when there is a partner. Material participation usually requires that you work more hours than anyone else involved, including your partner, making this qualification tricky in partnerships.

2. Bonus depreciation is highly beneficial because it can be used to offset any income, not just passive or real estate income. It applies to both W-2 income and other forms of active and passive income, meaning that the STR loophole allows you to leverage depreciation beyond just real estate activity.

3. When selling a property, you will have to recapture the depreciation you've used to offset income, but you don’t pay taxes on suspended depreciation. Suspended losses can be carried forward and used to offset capital gains or depreciation recapture upon the sale of the property. If you perform a 1031 exchange, you may avoid immediate recapture taxes, but long-term holding strategies must account for eventual recapture.

4. Depreciation benefits for a property switching from long-term rental (LTR) to STR apply based on the entire calendar year. Mid-year conversions do not qualify for a partial year calculation of STR depreciation; you must meet the full-year requirements to utilize this tax advantage effectively.

5. To meet the "material participation" rules for STRs, there are multiple ways to qualify, but careful structuring is important. Using co-hosts might help distribute management tasks, but this can complicate your ability to meet the material participation requirements, especially the 100-hour rule. Rotating co-hosts for tax purposes may not make business sense, as it is difficult to find reliable management only to replace them quickly.

Hope that helps!

Hey Zachary, thanks for the response. on #1 I keep seeing "challenging" "difficult" and "tricky" but are you able to share the best way to do this?

Hey Nick,

Im glad i was able to help a bit. For the first answer, I understand it is a bit vague, but that is intentional as from our perspective as accountants we need to know all the material facts before giving you a "best way to go"

0 Votes

Quote from @Daniel Loane:

Hi everyone,

I purchased my first rental property in June 2023, and it took until December to prepare it for tenants. I posted the listing on December 12, and my first tenant moved in on December 26th.

As I’m filing my (extended) 2023 taxes, I’d appreciate any advice on what expenses I can deduct and what I should capitalize, especially since the property was mostly vacant. For context, (1) the property was in poor condition when I acquired it, and (2) I’m a passive real estate investor.

Here are my expenses:

- Travel (~$2,000) and meals during travel ($500)—I understand only 50% of meal costs are deductible.
- Gardening maintenance (just to prevent the grass from getting too high, not an improvement).
- In-year tax consultation ($300).
- Commission to my buyer’s agent ($300).
- Insurance premium ($1,000).
- Insurance deductible following a claim ($1,000).

I believe the property won’t begin to depreciate until it’s in service, which seems to align with how TurboTax is set up. If that’s not the case, any clarification would be appreciated!

Lastly, if anyone has recommendations for affordable CPAs in Cleveland or Ohio who could assist me, I would be grateful.

Thank you so much!

Hey Daniel,

Congratulations on your first rental property! For your 2023 taxes, you can deduct ordinary and necessary expenses, even if the property was mostly vacant.You can deduct the full travel expenses of ~$2,000, while meals are only 50% deductible, so claim $250 for meals. Gardening maintenance, the $300 tax consultation, and the $300 commission to your buyer’s agent are all deductible. Additionally, both the $1,000 insurance premium and the $1,000 deductible are deductible expenses. You’re correct that the property won’t start depreciating until it’s "in service," which begins with your first tenant on December 26th, so you can start depreciation from that date. Keep detailed records of all expenses.

As for tax professional recommendations in Cleveland: As accountants, we are not allowed to promote our services as it is against BP rules. I would strongly suggest you see who is providing value in the tax forums and then reach out to them to see if they are accepting new clients. Best of luck!

1 Vote

Cleveland, Ohio

Quote from @Hunter Gibson:

I am buying a home from an investor in Ohio and need help with the county taxes

The county the homes around 80k and I was going to buy it for around 400k how much will my taxes go up. Would it be possible to have the seller transfer the home into a LLC and then I buy the LLC from him.

This is 100% seller finance deal. Any suggestions

Hey Hunter, estimating tax is more of a guessing game here. County recorder's office is the best place to start and even then you likely wont get an exact number.

As far as buying the LLC from him, I would not suggest you do this. Create your own new LLC, then have him transfer the property to it and have the seller-financed mortgage mention your new LLC as the owner would be my suggested starting point.

0 Votes

Dayton, Ohio

Quote from @Samantha P.:

Oh just to clarify - I'm wondering if an international real estate purchase is eligible for cost seg, with the understanding that it couldn't also do bonus depreciation and that it has a different depreciation schedule. For the purpose of, say, minimizing capital gain in the same year.

I dont think it is, @Melanie Baldridge feel free to jump in but foreign assets like this usually follow the tax code from that country. Not sure if there is a way around this

0 Votes

All Forum Posts by: Account Closed

Account Closed has started 22 posts and replied 1212 times.

Post: Selling Rental with 2 Out of 5 Year Rule

Post: Trouble Finding a good Tax Pro

Post: Roth IRA vs. Cash: Tax Benefits & Depreciation on Multifamily Investments

Post: Can travel expenses be tax deductible?

Post: Is interest received from fix & flip loans subject to self employment tax?

Post: Filing taxes: when to expense vs capitalize for vacant rental property

Post: STR Cost Seg/Bonus Depreciation Buying with Partner & other non-RE related income ?'s

Post: Filing taxes: when to expense vs capitalize for vacant rental property

Post: Real estate Taxes

Post: Bonus Depreciation one of the best parts of RE Tax Code