Table Of Contents
In this episode, Thomas goes through questions that are frequently asked by clients and the Tax Smart Real Estate Investors community on Facebook.
This episode is sponsored by Landlord Studio and Tax Smart Investors.
Full Transcript:
This podcast has been transcribed using AI, please excuse spelling, grammatical, and other errors.
Thomas Castelli 0:00
You're now listening to the real estate CPA podcast.
Brandon Hall 0:05
Your source for all things real estate, accounting and tax. Here we reveal our secrets that can save you 1000s in taxes, streamline your accounting process and help grow your business. Stay tuned to hear insightful interviews with industry experts, successful real estate investors and current clients on what strategies they use to grow their business, and how they steer clear of Uncle Sam.
Thomas Castelli 0:30
Hi, everyone. Thanks for tuning in to this episode of The Real Estate CPA podcast your host here today Thomas Castelli, and what we're going to do is something a little bit different than we've done in the past. Today, we're going to go through some questions that I sometimes receive from clients, as well as questions from our tax smart real estate investor community on Facebook. If you want to join our tax smart real estate investor community on Facebook, you can go ahead and visit facebook.com type in tech smart real estate investors in the search box. And we're going to be one of the first search results that come right up. If you want to go directly to the group. It is facebook.com/groups/tech smart investors. Also as an update to last week's episode, the build back better act has not yet been passed there yet more delays and more issues within the Democratic Party preventing it from being passed, although Democratic leaders are committed to revisiting the bill before the Thanksgiving break. But there are still concerns that it might even go beyond that. So we'll keep you up to date each week on the status of the bill back better act. And when it does finally pass we will be holding a webinar for our tax smart investor subscribers and clients of the real estate CPA. You'll hear more about that when the bill is passed. So let's just jump right into some of these questions. We have a question from a tax smart investor, I'm going to leave their names out just for anonymity purposes, you can always join the tax smart investor group again, to join in on all the conversations that are taking place already. So the question is I'm getting a cost segregation study done on a single family home, and we already have put it into service as a short term rental property. The cost segregation study company sent a preliminary report that has depreciation on a schedule of 39 years, I thought residential property was 27.5 years. Well, traditionally, residential property is indeed 27 and a half years however, short term rental properties are not considered residential properties because they are generally going to be rented out on a transient basis, and are therefore depreciated over a 39 year schedule, like commercial property. Alright, here's a another cost segregation study related question. And that is, can you do a cost segregation study on a condo? And the answer to that question is yes. Alright, here's an often frequently asked question. We've covered this on the podcast here many times, and I'm just going to clear the air again, and is does travel time qualify as material participation? This was in context to a short term rental property, but we get this a lot on the real estate professional status. And the short answer is the IRS indicates that travel time to the rental property itself generally will not count as material participation. So that means if you have to travel two and a half hours, from your home to your short term rental property or to any rental property for that matter, and you're trying to use that time, this material participation, you can expect the IRS to disallow it under audit. Okay, we have a vehicle related question here. And it is can a leased vehicle be bones depreciated? Or does it only have to be a purchase? The answer to that question is in order to depreciate any vehicle, you need to actually purchase the vehicle. Now that said you could still use the actual expense method, if you use the vehicle more than 50% for business and write off the cost of the lease the monthly lease if you do indeed lease the vehicle, but it cannot be bonus depreciated. Alright, we have a another bonus depreciation related question here. And that is if I put a long term rental property for $500,000. And now it is up to $1.2 million, because it appreciated and I do a cash out refinance followed by a cost segregation study, would the depreciation be higher than if I not done the REIT cash out refinance? And the answer to that question is no. The depreciation would not be higher the depreciation is going to be based on the cost basis of the property when you acquired it, plus any improvements you made to it. Unfortunately, appreciation will not help you increase your depreciation expense. All right, now we have an entity structure in question and that question is what type of entity should hold a long term rental property? And I just want to start out by answer by saying that entity structuring is generally for asset protection purposes. So you're gonna want to speak to an attorney whenever you're doing any type of entity structuring but from a tax perspective, typically you want to hold a rental property in either a single member LLC that is disregarded for tax purposes or through a partnership. If you are going to have partners. i We have a question about bonus depreciation. There's a lot of questions about bonus depreciation. And that is if I buy a rental property in 2021, but don't place it into service until 2022, can I still take 100% bonus depreciation? Yes, you can start depreciating the property in the year that is placed into service. If you place in the service in the year 2022 bonus depreciation is still at 100%. For anybody out there who's not aware, bonus depreciation will begin to phase out starting in the 2023 tax year it when it starts to go from 100 to 80%. So that means if you want to take full advantage of 100% bonus depreciation 2022 is the last year that you could place properties into service and take advantage of 100% bonus depreciation. Alright, here's a question we get a lot when people qualify for the real estate professional status. And that is if I have suspended passive losses from prior years and I qualify as a real estate professional in this current year, do those prior suspended losses get unlocked? Or do they remain suspended? And the answer to that question is they are going to be considered losses from a former passive activity because that activity was passive prior to you becoming a real estate professional. And they do not get unlocked when you become a real estate professional. Instead, what happens are they remain suspended. And they can be used if and when you have net income from that activity. So that's typically going to be net rental income, or to the extent of a gain on the sale of that former passive activity. So the bottom line is, they do not get unlocked by becoming a real estate professional. Instead, they just remain suspended. And they can be used when you have income from that activity. All right, here's another question we get a lot from California residents. And that is Is it true that the real estate professional status does not apply to California? And the answer to that question is, if you're a real estate professional and you live in the state of California, your losses can still be non passive at the federal level. However, for the purposes of California state taxes, they will still be considered passive. So that means that when you file your California state tax return, those losses will still be passive at the California state level. Alright, here's a question on cash out refinancing. If I do a cash out refinance on a rental property, is that cash out refinance that money I received from the cash out refinance? Is it taxable? And the answer to the question is generally no, it's not going to be taxable to you. Alright, we have a nother syndication related question. That is if I have suspended passive losses from other rental activities, can they offset the gains from my interests in syndications? And the answer that question is yes, passive losses from one passive activity can generally offset the gains from other passive activity. So if you have suspended passive losses, or current passive losses from your other rental activities, or even other syndicates, they can be used to help you offset the gain on sale when you exit a property via syndication. And the same goes the opposite way. If you have rental properties, or you have you if you have income from rental properties, or if you have gains on the sale of a rental property, you can generally use losses from syndications to offset the gains when you exit those properties. Alright, another financing related question. If I buy a five unit property, and my lender considers it a commercial loan, does that mean the property's depreciated over 39 years? And the answer to that question is, it depends if you buy a residential property, and that can be a single family property or a multi family property, it doesn't really matter how many units that multifamily property has. from a tax perspective, it's going to be considered a residential property and it's going to be depreciated over 27 and a half years, it doesn't really make a difference how the bank classifies that loan. See, in the world of commercial real estate properties with more than five units are considered commercial. However, for the task code, if it's a residential property, and multifamily property is still considered a residential property and going to be depreciated over 27 and a half years, only commercial properties like office buildings, retail centers, hotels, things of that nature will be considered commercial for tax purposes and depreciate over 39 and a half years. Alright, here's a question related to retirement accounts. And that question is if I have losses from a rental property or syndicate that's held within an IRA or 401k? Can I use those losses to offset rental income that I own personally or through a partnership? And the answer to that question is unfortunately, no passive losses that from properties that are held within a 401k or an IRA are trapped within those accounts and do not actually flow through to your personal tax return and therefore they cannot be used to offset the income you have from properties you own personally. Alright, one more question for today and it's going to be on the real estate professional status. If one spouse qualifies as a real estate professional and the other one does not. Can the spouse the qualifies as a real estate professional use losses to offset the other spouse's income? And the question answer that question is absolutely. So if you're Marriage you file a joint tax return. If one spouse qualifies as a real estate professional meets the material participation tests for your rental activities, those losses will be considered non passive and can offset the other spouses income. Alright, so that was the last question for today. If you want to get answers to your real estate tax questions, head over to ww.facebook.com/tax. Warn investors and join our tax smart investor community where you can ask questions and get answers from members of the community, including our own team members can also get access to live q&a sessions with our team by becoming a tax smart Pro or tax smart plus subscriber by heading to WWE dot tech smart investors.com and signing up today. We'll catch you over there. But until next time, Happy investing. Thanks for listening
Brandon Hall 10:45
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