Several of today’s tax questions address bonus depreciation and when you can take it on single and multiple property groupings, including on short-term rentals. Toby Mathis and Elliot Thomas, tax attorney of Anderson Advisors, discuss the detailed specifics relating to several different tax scenarios involving bonus depreciation. They also discuss cost segregation and frontloading depreciation deductions for real estate assets into the early years of ownership. Submit your tax question to taxtuesday@andersonadvisors.
- Taking the 5,7, or 15-year depreciation – You can only choose one, but you can spread them out over different years and different properties.
- Bonus depreciation – equipment leasing company rents to a) a construction company and b) another company with no employees. Should they add a third? – No, adding would have the opposite effect. If you wanted to group a and b together, you probably could. This is active income and if you want to avoid self-employment tax, pay yourself a small salary.
- A listener rents a single-family property on a flat lot that gets a lot of rain/water damage, can they deduct rain barrels/hardware? Yes, you can do it all in the first year, bonus depreciation, as it is not an “improvement” and it’s under $2500 per line item.
- Can I group short-term rental activities if one property has an out-of-state property manager? This falls under passive activity loss rules – an STR can be passive if you’re not participating. Each rental is a business, like a pizza parlor. This is a trader business. Make a statement for aggregation on your return.
- Can I amend my 2021 taxes to do cost segregation? Yes, you can, the deadline is Oct. 17th- send us how much you saved!
- A U.S. citizen gets a gift of property in another country. Do I need to report to IRS? Typically no, and you pay no tax, but fill out a form if the property value is over $100K and foreign. You have to list it on Form 3520.
- Bonus depreciation on rental, if taken in the first year of service, can I use any of the depreciation for next year? It’s only the first year that you break out of that property.
- If a CPA does your taxes, and you get revised/audited, it’s ultimately only your responsibility at the end of the day.
- Shout out to the staff for helping to answer questions in the middle of tax season
Tax and Asset Protection Events
Full Episode Transcript:
Toby: All right, welcome to Tax Tuesday. If you’re looking for tax Tuesday, you’re in the right place. If you’re looking for tax Wednesday, Thursday, or Friday, you can probably watch recordings. You can still be in the right place. Hey, this is Toby Mathis.... Read Full Transcript
Eliot: Eliot Thomas.
Toby: We’re going to bring some tax knowledge to the masses today, so it’s very exciting. Eliot here is a tax attorney, though he doesn’t put that after his name. I have to put the big ESQ to make sure that’s—I don’t even know what that means. Esquire?
Eliot: That means gentlemanly or something.
Toby: It means something.
Eliot: That’s why I can’t use it.
Toby: You put JD. What else could you put after the end, attorney or counselor? Anyway, we’re done with that. Tax Tuesday rules since we’re two lawyers who don’t have a CPA today. We have some on of course. If you could ask your questions in the Q&A, we have staffed even during tax season.
We have Dana, Matthew, Patty, and Troy. I think we have Christos probably. Piao’s on? All right. We’re still grabbing people from the tax department, even though this is tax season and they are getting killed. Are they going to be nice? We’re always nice.
All right. If you have questions, you can always email them even when we’re not doing this. In fact, it’s where we grab our questions every week or every other week. It’s taxtuesday@andersonadvisors. You can ask general questions there. We still answer them because we try not to put a big paywall behind you and getting answers to questions. We get about 500 a week, so sometimes be a little patient.
If you need a real detailed response, facts specific to you, and it’s giving you advice, then we’re going to say you got to become a Platinum client. Platinum client is $35 a month, but they still get to ask tax questions in writing, and you get as many as you want. Those ones we ask that you do the tax in writing just because it’s usually very fact specific and we don’t want there to be confusion. You can also talk to the attorneys ad nauseam pretty much. Lawyers like to talk, so you can always get one on.
Hey, anybody there? Yes. They’re excited to talk to you. They don’t bill you for their time. They just answer your questions. We’re in the field specifically of asset protection, business planning, legacy planning. If it’s a divorce question, we’re probably going to say, we can’t help you much unless it’s a tax question.
All right. It’s fast, fun, and educational. We’re going to have a lot of fun. Where are you from? I know that we always do this. Let’s see where everybody’s at. Hey, there’s Anacortes. Don, I think that you always come on, and my mom’s right there on Seventh St. in Anacortes. She walks into the Rockfish sometimes or she used to coat walk in there. She works at the Red Door, which is one of the thrift marks there, all that good stuff.
Let’s see where. Kahului, Maui. I’d go to that one. New Jersey, Las Vegas, Granite Bay, New York, SoCal, San Juan, Puerto Rico. Daniel’s got electricity. Hopefully, you guys are doing okay there. We love that area. Hope you guys are doing great.
Austin, Chandler is in Houston, Texas. Beverly Hills in the house. We have a lot of California going on. A lot of folks from Texas. There’s Seattle. We’re just talking about it. Somebody asked, is this live? Yes. I’m in Tunisia in South Africa. Love South Africa. I’ve been there. I’ve done some hunting there. People get mad at you if you go hunting there, but no. It’s actually for food. Everybody eats everything on those animals. Honolulu, Crystal Bay.
We got people from all over the place. This is awesome. We love it. There’s Reno even and Smyrna in Georgia. Is that how you say it?
Eliot: I think so.
Toby: I just butcher stuff. All right, let’s go over. There’s Tampa. Mark, praying for you sir that you guys do okay in this storm, so please be safe. We got a lot of our folks down there. A lot of our employees from Anderson actually worked in the Tampa area. We got a bunch of them. Let’s send out good vibes and may that storm be weakened. I’m in Tampa and you are distracting me. Ignore the storm, it’s not coming.
They’re saying category two, maybe one. It’s always the storm surge. Hopefully, you guys get a glancing blow, and then it’s not as big of a deal. You never know this day and age with TV. Those guys like to hype it sometimes, but sometimes it’s not the hype. Just be safe.
All right, opening questions. There are about 10 of them. Let’s go over this. “Can one pick and choose properties in a cost segregation study and take bonus depreciation for multiple years? For example, can one take bonus depreciation on the 5-year properties for 2021 and the 15-year properties for 2022?” We’ll answer that. That’s a good question, by the way. It’s very specific.
“I have an equipment leasing company that rents equipment to my construction company to another company that is a manufacturing plant. My CPA said the revenue is considered active. There are no employees when opening the equipment leasing to others remedy that.” We’ll go over that too. Good questions so far.
“We rent out single-family property that is on a flat lot. Our winter rain storms damage the foundation and make the house cold. If we buy six 200-gallon rain barrels and hardware for about $4000, can we deduct it for 2022?” Good question. We’ll get into that.
“Would it be reasonable to group short-term rental activity?” STR just stands for things like Vrbo, and Airbnb. “Would it be reasonable to group Airbnb activities or short-term rental activities (including out-of-state) together with a,” this is a regulation, “1.469-4 grouping and materially participate in the group? What if the out-of-state ones have a property manager?” Good question.
Eliot: That’s a fantastic one.
Toby: Yeah, this is like stump the tax people. I can’t answer a single question. I’m glad you’re here. “If a US citizen receives a property that’s located in another country as a gift, does he or she need to report it to the IRS? If so, what paperwork is needed for it? Does a real estate gift from a parent get taxed?”
Then we have a long one. “My question is about bonus depreciation, which I realized must be taken in the first year that the depreciable item is placed into service. The property was purchased this year and was informally placed.” We’ll dive into this one, don’t worry. Some of you guys are already seeing the issue here. “The property was purchased this year and was informally placed into service for a very short period of time to family and friends, but needed renovations to open it to a larger Vrbo market which we did this year.
It is now placed in service. Not sure if I can qualify this year for the real estate professional or the professional real estate status designation. Any chance I can use any of the bonus depreciation for next year since without the designation, I can’t take a loss unless I want to carry forward. Also, I seem to remember that you have to place the property in service before the expenses are incurred to take bonus depreciable.” So depreciation. Great question. We could just do an hour on that one. That one’s popping open a whole bunch of goodness.
All right. “How does accelerated depreciation work in general and more specifically for multifamily syndication as both a passive and non-passive investor?” Good question. That’s a good one too.
“What are my options if the IRS refigures your taxes and you have a CPA reviewing and signing off on the return?” We’ll have to dig into that one a little bit.
“After cost segregation, how long do we need to hold the property? Is there hold time restrictions to sell after cost segregation, or can I sell the property after cost segregation and do a 1031 exchange for tax-deferred?” I don’t write these guys, so if you see weird typo things, sometimes we’ll massage a little bit for the most part. I’m always like, hey.
All right, we’re going to answer all of those. If you’re already having so much fun and you say, this is so much fun, I don’t want it to last just an hour, an hour and a half, or whatever it is, I want to get more, go to my YouTube channel. There’s my smiling face. We record all of these and put them up. We usually put the questions.
You could tell if it’s Tax Tuesday because it’ll be an hour-long video, generally speaking, and it’ll have a whole bunch of different questions. But it’s just mind food. It may not even be like, hey, I’m not doing a lot of rental properties, but you never know when something’s going to sneak up and give you a return that you didn’t anticipate.
I will tell you what, in this day and age, the way everything’s going right now, I would want every little nickel I can get my hands on and I put it into service. I don’t think I would sit on cash, but I would definitely be agitating the markets right now. I think this was the fourth worst start of the S&P in history. It’s not even the worst.
I could tell you, it made new highs after all of them. All right. This is going to be fun. “Can one pick and choose properties in a cost segregation study and take bonus depreciation multiple years? For example, can one take bonus depreciation on the 5-year properties for the 2021 tax year and 15-year properties for the 2022 tax years?” What say you, Eliot?
Eliot: You can do the five-year property on a particular property if you did a cost seg. Take all that five-year in that one property in one year, and then the rest of it in that particular property, the 10, 15, 20 would be depreciated over time. But you don’t have to do that for all your properties.
What you can’t do is you take the 5-year this year, then next year, just immediately bonus depreciate all the 15-year. I don’t think you’re allowed to do that unless maybe you’re reverting back to the previous years’ cost seg study. Because I know we can go back with cost seg studies, but I’m not sure about when you break the pieces, 5, 10, and 15 like that.
Toby: Yeah. What Eliot is basically saying, and not to paraphrase you, but when you take a building, specifically when they see properties in a cost seg study, you’re talking about a building. Let’s just say we’re here in an office building, this is a 39-year property. I use this example all the time, so I apologize if you’re like, oh, here he goes off again about carpeting.
We have carpeting under our feet that your accountant would say is a 39-year property, but we all know that this carpeting isn’t going to make it 39 years. The IRS will say it’s five-year property, but we have to break it out.
We have to say, here’s the value of the carpeting, here’s the value of cabinets, here’s the value of the trees. You literally depreciate the trees. You depreciate the car lot, the parking lot. You get to take that over 15 years and you break these out into their pieces. That’s step number one. That’s a cost seg.
Step number two is, do I bonus it and take it all in one year? This is the last year of 100% bonus depreciation. If you put a property into service in 2022, I could take any item that’s 5-year, 7-year, or 15-year, boom, write it off in one year, but I have to pick.
This is the only year I can do this. I can choose 5, 7, or 15. One or all or none. I could just depreciate them over five years, or I could depreciate in one year and take bonus depreciation. In fact, I had to opt-out of bonus depreciation.
What I think we’re getting at is, hey, if I pick a property, can I bonus 100% of the five-year property in year one and 100% of bonus depreciation on the seven-year in year two? The answer is no. It’s the year that you decide, this is my 5-year property, 7-year, 15. It’s that year that you have to take bonus depreciation or lose it, and you get to opt-out.
What Eliot just pointed out so smartly was that, but you could choose different properties for different years that you’re going to do a cost seg on. I could cost seg a property this year. I could say, hey, based off of my facts and circumstance, you could still be doing cost seg by the way for 2021 up until your return is due with extension, so it’s October 15th this year.
You could make a cost seg. You could say, hey, do I want to do this or not? Let me see. Okay, I’ll cost seg this one this year. In 2022, I’ll cost seg another. You’re allowed to do that.
In that one, I could bonus depreciate the five-year property for property number one in the first year. In the second year, I could accelerate the depreciation on the 15-year property on property two or the 5, 7, and 15. I hope you’re getting that. There’s a lot of flexibility here. It’s just on this one property, you can’t do that over multiple years. I hope that makes sense. Anything you want to add on that?
Toby: It’s exciting stuff, guys. How often are you seeing bonus depreciation and more specifically, cost segs come up?
Eliot: Every day right now, especially this time of year, because as Toby pointed out, we still have time really to do those up until the 15th on our personal returns. This is one of those things that we still can take advantage of. It’s not just that we can still do it right now, it’s a heavy hitter of the deductions in the tax code right now. It’s very popular right now and will continue next year as well.
Toby: Yup. The bonus depreciation doesn’t go away next year, it just drops to 80%. If my carpeting is worth $100,000, in 2021, you could write off 100% of it if you did a cost seg for 2021. If you did a cost seg for 2022, you could write off 100%, $100,000. In 2023, you cost seg that same property and put it into service, then you’re writing off $80,000, and you’re writing off the $20,000 extra over five years.
Again, it’s not bad. It’s just starting to phase down a little bit. We see a little bit of that. All right. Here gets fun stuff, equipment leasing company is what everybody is excited to hear about.
“I have an equipment leasing company that rents equipment to my construction company and to another company that is a manufacturing plant.” Company A rents equipment to Company B and C. B and C have different owners. B has the same owners as Company A that’s doing the equipment leasing. “My CPA said that the revenue is considered active,” which company? We’ll get into that. “There are no employees. Would opening the equipment leasing to others remedy that?” It seems like they’re focusing on the equipment leasing company.
Eliot: Yeah. I think the problem here is that if we are already active, assuming that’s active to both companies that you’re renting to, adding a third is only going to further, I think, bolden the fact that this is an active business because now you brought in yet another business. You’re doing unrelated leasing to this unrelated business. I think that just bolster is showing that this is active income. It’s not just internal, so no. I think that would have the opposite effect more than likely.
Toby: Yeah. Equipment leasing is always active. I think that’s the big thing. Where you see rents become passive is when it’s rental activities. If you’re in a company that’s being run by somebody else, you could possibly be passive because you’re not materially participating, but I think equipment leasing is always subject to self-employment tax.
The bigger issue here is this idea of a third-party having anything to do with it, and it really doesn’t. But whether it could come into play is if you decide you’re going to start grouping activities together. If you wanted to group the construction company and the leasing company together, you probably could. I wouldn’t see if it’s the same ownership. I guess they always do the facts and circumstances.
We’re not even in passive, so I don’t even know if we’d have to do it. Actually, I don’t even think you’d have to worry about it. I don’t even have to worry about grouping. The only time I’d have to worry about grouping is if it’s rental property being leased to the construction company. Under those rules, it gets really wonky when you have self-rental because the self-rental could be considered non-passive.
Most people group it. If you have an accountant that knows what they’re doing, they’re going to group an active business with a rental business to make the rental non-passive loss, offset the income from the active business. Otherwise, you could have a bad tax effect of not getting to use the passive losses so you could make them non-passive. All of a sudden, you could have issues if you have other passive income. It wouldn’t offset, so it’s like, ah.
The answer to this one really straightforward is it’s active. There’s not much you can do about it, but what you do is look at the type of entity. If you want to avoid getting hit with self-employment tax on all that income, you might want to consider S-corps and making the leasing companies into something that is not subject entirely.
Especially, if it doesn’t have employees on that leasing company and you’re not really doing that much, it might be that you take a really small salary. All that income, it’s not passive, but it’s not subject to social security taxes, which gets you to the same place, kind of. Anything else on that one, sir?
Eliot: No, we’re good.
Toby: Pontificating too much. “We rent out a single family property that is on a flat lot,” I think what they’re saying is, hey, we have a house on a really flat lot. When it rains a bunch, it messes up the house. It damages the foundation and makes the house cold, which is kind of odd.
“If we buy six 200-gallon rain barrels and hardware, can we deduct it?” It sounds like they found a solution to the issue, which maybe is to keep the moisture off the ground or something. I don’t know what it is. I’ve never run into this, but you have a lot of rain, so you’re buying barrels in a hardware. Can you write it off? What say you?
Eliot: Yes, the answer. Can we do it all in the first year? Yes. One popular thing that would pop out here, I think, to a lot of people would maybe be the $2500 de minimis election. We’re over that amount because we have $4000. But going along that same path, there is a provision that if it’s lesser of $10,000 or 2% of the unadjusted basis of this property, you could add to it and probably still deduct immediately as a kind of a prepare.
Toby: Are you assuming that this is an improvement?
Eliot: I would think it’s probably not an improvement. But just in case the IRS even argued it, I think you have a perfectly good explanation for why you could deduct it, so I don’t see any problem at all.
Toby: What you just hit on was the safe harbor of $2500, and that’s per invoice or per line item on an invoice. The line items here would be six 200-gallon rain barrels. If they’re below $2500, you’re as good as gold. The hardware, you would break that out, and you’d look at each line item. You’d have to be $2500 or under $2500 for each. Otherwise, what are we writing this off? What would be the useful life of a rain barrel?
Eliot: Yeah. I don’t see it as an improvement. But even in a worst-case scenario, I think you have a way around that.
Toby: Your bonus depreciating it anyway, right?
Toby: You’re just trying to make sure that it’s not an improvement, so it depends on what you’re doing with it. If you’re installing it somehow to the home, benefiting the home, and making it more valuable, then we’d probably have to do a cost seg and break it out. Again, if you’re below that $2500, they can’t even question it. It’s boom, safe harbor, it’s a repair, done. You don’t have to think about it.
It’s not $2500 per invoice. It’s $2500 per line item on an invoice. Assuming that the six 200-gallon rain barrels are underneath that $2500 in the hardware is also underneath that $2500, but they add up together on $4000, you shouldn’t have a problem. Even if it was more, I think you wouldn’t have a problem.
All right. “Would it be reasonable to group short-term rental activities,” we’re talking Vrbo and Airbnb, “including out-of-state properties together with a Reg 1.469-4 grouping and materially participate in the group?” The secondary question is, “What if the out-of-state ones have a property manager?”
Eliot: Yeah, this is an interesting one. First of all, as Toby’s pointing out, he keeps mentioning that we’re talking about Airbnb, Vrbo. We got to remember that short-term rental has a very unique, specific definition in the code. Just because you’re Airbnb-ing something, doesn’t mean you’re going to fit short-term rental in the IRS’ eyes. That aside, and if we’re just assuming that we fit that and we’re calling it short-term rental, you can group if you want.
What that will allow you to do is, and it’s kind of bringing in the second question, you’re going to have properties locally that you’re managing yourself meeting all the criteria for. But then you have this one outlier that maybe is across the country and you have another property manager. On its own, you may not qualify with that one property. But by grouping, you could probably pull it into the fold there and then do exactly what you’re trying to do here, I think, with depreciation probably.
Toby: Yeah, so what’s a reg?
Eliot: It’s just the IRS’ interpretation of what the tax code is.
Toby: Yeah. The code provision here is 469, which is passive activity loss rules. We’re talking about passive activities. A short-term rental couldn’t be a passive activity if you don’t materially participate. The only question here is, are you materially participating in your short-term rental activities as a group? What we know for sure is that when you have rental property, and rentals are anything eight days or above, I’m not going to get into the substantial services, extraordinary services, and all that.
Just figure in real life, eight days and above average tenant if you’re renting it out. Then we have to group those all together if we’re going to be a real estate professional because our material participation is per property unless we group them. Here, we’re just saying, hey, this is short-term rentals. This is not a rental activity underneath the code as far as it is not a passive activity by itself. It is a trade or business.
Can we group a number of these? I always say pizza parlors. Every time somebody says short-term rental, I say pizza harbor. You like to make fun of that, right?
Eliot: I was actually going to make a t-shirt.
Toby: Toby’s Pizza?
Eliot: I may still do it.
Toby: Each short-term rental is really a pizza parlor, and it’s an operating business. The only question is, am I materially participating it? This is no different than if I have a bunch of pizza parlors. Generally speaking, in a pizza parlor, you’re going to wrap them all up into one entity. You’re probably going to have a parent company.
In the short-term rental, we probably want those losses to hit us. We might group them up through a partnership. We might group them up through a disregarded entity, but at the end of the day, it’s you. You need to make that election to group all of those short-term rentals, and it’s only for purposes of material participation. This has nothing to do with real estate professional status.
Because it’s a short-term rental activity, we do not care. It is not a rental activity that is considered passive. It is a trade or business. It’s a pizzeria. The only issue is, did I materially participate? The reason that I want material participation is to make it non-passive so that that loss can be used against all my other types of income. That’s it.
If I have a bunch of Airbnbs, and I know, oh, yeah, I could offset my W-2 income. I could do this great tax maneuver. I’m just using the tax laws in my favor, and I’m like, yes—somebody says, “If you eat too much pizza, you’ll look like a hog.” I guess not. John, stop that. John’s misbehaving again.
Anyway, all we’re doing is saying, hey, we want to use these in our favor in this particular year. Again, the way the cost segs and everything else work is the short-term rentals, we could pick sometime in the future. Hey, I have a lot of W-2 income, maybe it’s not this year, maybe it’s next year. And then boom, I can unlock a whole bunch of depreciation. It’s grouped by activity together, my short-term rentals together, which is, I think, there are four provisions. It’s common ownership, the nature of the activity, and all that fun stuff.
If you choose geographical proximity and all that stuff, you can lump them together and say, all right, here’s this one business that I’m running and materially participating in. Now I have a non-passive ordinary loss that I can use to offset my W-2 income. That’s why people love short-term rentals from a tax standpoint. I’m just seeing if there’s anything in the chat. I keep seeing just Patty. I’m going to expand this. Bear with me, guys. There we go.
Eliot: Patty taking over?
Toby: “If you have a group of rentals for material participation, how is that election?” It’s actually something you do on your return. You’re literally just saying we’re making a grouping election, the mechanics of it. “Do I still report them separately?” Yes. You still report them separately, but you treat them all. Rosa, you treat them all as one activity. Literally, you’re putting a little statement on your return?
Eliot: Yeah, there actually will be a statement for aggregation on that that you’d make on your return. You just glue them all together, but you do report them all independently.
Toby: Yeah, so you treat the group of the activity, so those rental losses. I wouldn’t make a grouping election on rental property that you have a whole bunch of loss carry forward on because it locks it. But you’re looking at it going, all right, let’s see, I’m a real estate professional. If I make this designation, and I could choose not to or I could choose to, boy, oh, boy, I could do myself some good.
Eliot: Just remember, Rosa, that pulls in all of your rental activity, even syndications. It’s all-or-nothing.
Toby: Somebody says, “Does the short-term rental need to be within your own town or can it be a condo?” It could be anywhere if you’re grouping them. But you want to materially participate. There are seven tests that you could meet any of them. The most common one, if it’s in your hometown and you’re the one managing it, you don’t have to worry about anybody else. If you have a property manager that’s doing it, then the question is, do you and a spouse do more than 100 hours a year in more than anybody else?
The way that court trips people is property managers don’t track time. The real one there is probably closer to the 500-hour test. You and your spouse meeting 250 hours each, so 500 hours total would meet the material participation test on a yearly basis. Boom, you don’t have to worry. You could have a property manager and all that fun stuff.
“Can you materially participate in short-term rental using property managers if you meet the more than 100-hour rule?” I think we just said that, Philippe. Technically, yes, but you’d want to make sure that that property manager is documenting who’s doing what on your property. Just because if you’re asked, the IRS is going to say, who else did substantial services? Let’s see.
It’s not the company. It’s the actual employee for that company. Johnny and Sal over here were the cleaners. How often do they clean your property? How many hours? Okay, we add that up. They did 30 hours. You’re like, okay, I did 100 hours and it’s way more than everybody else. I’m good.
If it’s, hey, but we also had these other guys doing a lot of work on your properties. These ones over here, they did 110 hours. Okay, now I have trouble. I need to show how many hours I did, how many hours they did, and then I did more. Cool. “Is that the person, not the company?” It’s the person. Yup, so you’re already out.
“If you buy a rental property together, wife is a real estate agent and husband is not, can you still be considered active?” Yeah, absolutely. It’s per couple. You add your times together to meet the material participation. The issue is it sounds like your wife would probably be a real estate agent, would be a real estate professional, and she would meet the first test which is 750 hours more than 50% of her time.
It’s under 469(c)(7). If I’m not mistaken on this reg, it’s 1.469-4(c)(2). That is the provision you’re probably actually triggering here to do the grouping election, which is what you put on your return. I’m making a grouping election pursuant to such and such.
Eliot: Just for technicality here, grouping is very different than aggregation. They’re similar concepts, but aggregation is going to be with your long-term rentals, and we’re pulling all your long-term rental activity into one big group. Grouping is where you have different businesses that you’re trying to find similarity with and putting together for material participation purposes.
Toby: Good enough. All right. Tax and Asset Protection Workshop is coming up on October 1st. Is that this weekend?
Toby: So we’re already into October?
Eliot: Right there, almost. Yeah.
Toby: This year has just been like […]. Yeah, it’s getting towards the end of September. We’re in tax season. Everybody’s like, oh, they’ve been getting crushed. Somebody says, “Earlier, you mentioned it’s not too late to do a cost seg for 2021. If the 2021 tax is already filed without cost seg, can you amend them and do it?” Yes, Kevin. This is why you’re here.
“Can you do the bonus depreciation? What would the deadline to amend? Is it October 15th?” It’s actually October 17th this year. Do it. And if you need a good cost seg person, Ian’s in this What’s Ian doing?
Eliot: He’s married right now.
Toby: It’s like irresistible. He’s like, oh, there are questions. Somebody needs to answer them.
Eliot: I think it takes his mind off things.
Toby: I would be curious, Kevin, if you would be willing to share once we are done, how much it saved you in 2021. Just send us an email to our Tax Tuesday and just say, hey, by the way, it saved me like $15,000 or whatever it is that you’re going to save because of that. It just tells you why you stick around and listen to this stuff because you never know when it’s going to save you some money. It’s like a nice vacation that ‘s going to save you.
All right, Tax and Asset Protection Workshop. My partner Clint Coons does the morning, I do the afternoons. He does a great job on asset protection, security through obscurity, creating a great plan, keeping your stuff out of reach of all the nasties out there, lawyers, snoops, Uncle Sam. I do tax in the afternoon. We work just on real estate. We’re going to show you how to build a great blueprint, a great plan to help you create a legacy. This is fun.
“Does the short-term rental period consider who was renting to if someone stayed three different times?” You’re fine. It’s unique rentals. They’re always looking at it. If you rented it, again, the way the IRS says is you take all the days that you rented it out as a short-term rental and divide it by the unique rentals. I think that if you had somebody stay three days in a row and you had three different rentals, they would say no. But if you had somebody stay three days this week, three days next month, three days the other, they’re going to break that up.
All right, I’m just answering questions. Sorry, guys. Sometimes I just read the chat. It’s right in front of my face and I can’t help myself.
All right, here’s a good one. “If a US citizen receives a property that’s located in another country as a gift,” let’s say it’s Spain. You get a villa in Marbella. You’re like, okay, I’m doing good. “Does he or she need to report it to the IRS?” Let’s just answer that one first.
Eliot: Probably at that dollar value, yes, but typically, no. First of all, it’s not going to be taxed, but you may have to report it if it’s over $100,000. You just fill out a form, but you’re not going to be taxed on it. Though, if you do get over that $100,000 mark, every gift that’s over $5000, you have to individually list out, but there’s no tax.
Toby: If you receive a gift, you have to list it on your return or is it just from foreign sources?
Eliot: If it’s from foreign sources and it’s over $100,000, then we need to report, but we’re not paying any tax.
Toby: Not paying any tax is the only part you need to know. What paperwork is needed for it again?
Eliot: I actually wrote that down. I think it’s Form 3052 or something like that.
Toby: Yeah, so you can make sure that you’re getting it. “Does the real estate gift from a parent get taxed?” Not by you. What’s weird is if I can give Eliot here half a million dollars, he pays no tax on it. I do.
Eliot: I’m a grantor.
Toby: Unless I choose to use my lifetime exclusion, which right now is sitting at around $12 million. I can give away a lot of money. Let’s turn that one around. Eliot can give me a half million dollars.
Eliot: Yeah. I’d have $11 million to the $12 million. I’m a little bit light on that right now, but yeah. For the foreign report, it is Form 3520. In the US, if it’s a US individual giving a gift to another, again, you might fill out, and I always get this mixed up Form 709, but they’re just forms. All you do is you’re going to have to report it, but there isn’t any tax unless we’re over 11.
Toby: You can always receive stuff, that’s the thing. There are a few states that have inheritance taxes still, but that’s only when there’s death. When we’re gifting, maybe there’s one that triggers on the state side. On the federal side, it’s never taxable. There are very few instances where I think a state gets involved. We like that.
All right, long question. “My question is about bonus depreciation, which I realized must be taken in the first year that the depreciable item is placed into service,” kind of, right?
Eliot: Yeah, a little bit right.
Toby: I could have a property for five years and I could choose to change it to accounting method under the 3115 and say we’re going to cost seg it. That’s the year that I have to do the bonus depreciation. Technically, not quite. It’s the first year that I break out that property, then I have to take bonus. I’m supposed to take it or opt-out.
Eliot: Now I would have to go back to the bonus depreciation rule for that year that I put it in service though. That might be where you’re getting caught on this first year part.
Toby: “The property was purchased this year and was informally placed into service for a very short period of time to family and friends. But it needed renovations to open it up to a larger Vrbo market, which we did this year. It’s now placed in service.” When I see family and friends, I always think personal. If I rent to somebody under market value and if I rent to somebody that’s a family member, that’s personal use. I don’t get to depreciate it.
Eliot: What happens is you’re going to add up all these personal use days, you’re going to have all the true fair market rental days. If you’re at the thing over 14 days or 10% of the fair market rental days that you’ve used it personally, then you’re going to be limited to your deductions up to the amount of income that you actually received. You could really do yourself a disservice.
Toby: You’re not going to get the loss. Let’s just say you were using it for personal services. This is the reason I’m going to say that. It’s like, all right, now it’s placed into service. Now, this is the year that we care about 100% bonus depreciation.
“We’re not sure if we qualify this year for professional real estate status.” We don’t have to worry about that if this is Vrbo and you’re seven days or less average use. Because if you average less than seven days or less, it’s a pizza shop. It’s a trade or business. It’s no different than any other business. You don’t have to worry about professional real estate status, it’s real estate professional status.
“Any chance I can use any of the bonus depreciation for next year since without the designation, I can’t take the loss unless I want to carry forward?” The answer is yes. What you would do is, hey, we would just treat it as a 39-year property since it’s a Vrbo. I would treat it as typical process. If it was single family, maybe 27.5. Residential would be 27.5 years, but this is 39 years because it’s considered a hotel.
I could just wait until next year. I could do a cost seg on it and take all the bonus depreciation next year. Absolutely, you could. But remember, you don’t have to qualify as a real estate professional. All we care about is, did you materially participate? Did you do all the activities?
Were you the host? If the answer is yes, we don’t have to worry about anything else. If the answer is no, then we go to step two, which is, did you do 100 hours? Did anybody do more? If the answer is yes to that, I did 100 hours, but somebody did more, then we go to the 500 hours. And if you’ve met that, then we don’t care about anybody else. Vrbo is vacation rentals by owner. It’s like an Airbnb, Mary.
“Also, I want to. I seem to remember that you have to place the property in service before expenses are incurred to take bonus depreciation.” Yeah, that’s absolutely right, before it’s depreciable because we put it into service because we don’t depreciate our personal property. The easiest way to think about this is if I bought a house and I was living in it, I don’t depreciate it. But if I moved out of that house and made it into a rental, then I could. Yay.
Toby: “How does accelerated depreciation work, Eliot?” This sounds like a lot exempt. How does accelerated depreciation work? Discuss. You have three pages. “In general and more specifically for multifamily syndication as both a passive and non-passive investor?”
Eliot: To really prep for this question, I actually went back and tried to come up with the actual definition of accelerated depreciation, which just simply means you’re deducting more upfront than you are at the end. That’s the baseline.
Toby: It’s bonus depreciation.
Eliot: Yeah. Bonus depreciation is certainly a part of that, but there are other types out there.
Toby: Here’s a good question, […]. “There is bonus depreciation in California for federal tax purposes. They will not allow you to take bonus for state tax purposes, so you end up with two returns.”
Eliot: Very good question there.
Toby: Yeah. California sucks. No offense, but your tax department, the Franchise Tax Board is a bunch of vampires. If you’re listening, go back into your coffins because you know that you are. We have a whole bunch of folks that worked for the service. We had tax attorneys that worked for them. They even say it was pretty brutal. Most people are like, we’re pretty vicious. There’s a bunch of you guys.
I can say it. I love you guys. I probably never be allowed to go back into California again, but holy schmoly, you guys are vicious.
Eliot: I’ll be checking for Toby at the border.
Toby: I want that team coming after my enemies. You go after them and you’re just […]. Anyway, accelerated depreciation is a fancy way of saying, anything that’s 5-, 7-, 15-year, and even 20 years or below useful life, you can write off in one year. It’s under 168(k). I can, boom, kick this huge deduction.
“How does it work for a multifamily syndication?” It doesn’t unless you do a cost seg. If I do a cost seg, I’m breaking out the personal property, which is 1245 property—that’s just for the accountants out there—versus the 1250 structural property.
Eliot: Your personal property and your real property—1245, personal property, 1250 being your real property.
Toby: Right. We never get to write off land, so it’s whatever is built on that land. You walk up to this beautiful apartment complex. You’re walking this little alleyway or the walkway and it has a nice little fan. It’s got some palm trees. You walk out there, there’s a pool, and you see all these cute little gates and all this stuff. All that stuff is a 15-year property for the most part. All that, you could write off in one year. That creates a big loss.
Now, the only question is, are you a material participant in that syndication? If the answer is no, then the next question is, are you a real estate professional? If the answer is no, then it’s passive. If the answer to either those first two questions—are you active in the management, are you materially participating—then it’s non-passive. Are you a real estate professional? Then it’s non-passive. Otherwise, yes, it’s a passive activity.
Eliot: If you aggregate, which we talked about earlier.
Toby: Yeah, I guess you’re right. Even on that one property. If I was a general partner in a syndication, then it doesn’t matter whether I aggregate it or not, that would be non-passive loss shooting down. If I’m a real estate professional, then I would have to aggregate my properties together to meet the material participation test. If I was a real estate pro, then it unlocks the loss there as non-passive.
Somebody says, “California is like watching the Titanic go down over two decades.” It’s still a beautiful state. It’s beautiful there, but man, we’re going to be nice. We’re not going to say anything. I love going fishing out of San Diego. Napa Valley is amazing. The beaches are gorgeous. It’s just you have a little bit of a…
Eliot: Tax problem.
Toby: Yeah. It’s kind of like that. Your family’s great, except we got that one uncle. He drinks too much and uses colorful language, and you’re like, everything’s great. This is a great holiday, but…
Eliot: But uncle Eliot showing up.
Toby: Uncle Eliot getting hammered talking some crap. That’s the problem. California is beautiful, you just got a little…
Eliot: That’s why I missed my invitation to Thanksgiving last year.
Toby: Yeah, skip it. I can’t see you ever being mad ever. You’re like the nicest guy on the planet. Eliot’s truly the nicest guy that’s out there. I can’t see you ever misbehaving.
All right, “What are my options if the IRS re-figures your taxes and you have a CPA reviewing and signing off on the return?”
Eliot: The tax liability is always the responsibility of the taxpayer. It really doesn’t matter if a CPA messed something up or didn’t, gave you bad information or didn’t. Whatever it is, the liability is yours as an individual.
Toby: And then if you don’t agree with it, that’s where you get to go to the office of internal appeals and you say, I don’t agree with this. Let’s take a look at it. You’re going to get a real professional looking at your information then. It’s not uncommon to have an examiner. You remember, Ronnie?
Toby: This is fun. Let me see if I can actually look this up in real-time. Ronnie had a client and he was going through an audit. Ronnie Withaeger is a great CPA, a great friend of ours, and used to work here. Let me see what he says. Oh, this is great, there.
He said he was in this audit and some inexperienced guy asked questions like, what airline do you travel on and what hotel do you stay in? After 90 minutes of answering questions, some new guy pops up and starts yelling that the shareholder loan is a dividend. We’re like, who are you? He was so combative. It was an awkward 10 minutes.
These were two of his statements. “Don’t cite code sections at me. I represent the interests of the government. I don’t care the way you see it.” Sometimes you get that auditor, we’ve seen that. It’s rare. But holy cow, when you get one, it’s like, you know what, just figure out what you’re going to say sir, ma’am, whatever. Just tell me what it is that you think I owe, and then I’m going to ignore you and go straight to your boss.
Eliot: No reason to engage on that.
Toby: Yes. Sometimes it’s just better to be like, you know what, you’re right. Bad me. The CPAs will just be like, […]. They’re going to tear into each other. But for the most part, sometimes you get an idiot.
Eliot: The smart play is like what Ronnie did. You laugh about it, but get out of that as fast as you can and file your appeal.
Toby: Ronnie’s like, go ahead and make your decision. That’s what he’s going to say. Go ahead and do it, don’t worry. If it’s us, we always back our return. We’ll fight on your behalf. We don’t charge you, so you’re like, you know what, just go ahead. Throw it out there, we’ll go to the office of internal appeals, and we’ll talk to somebody who knows what they’re doing that actually respects the law.
I’ve seen some bad ones. We had a poor guy come in with a $79,000 tax liability and CPA rolled over on him. He was a completely docile kitty just lying on his belly. We took it. It was like, you’re just absolutely dead wrong. Here are all the things. We just appeal, boom, done. It took two months, it was annoying. I think the liability was $1500, $2000 when it was done. Just know that sometimes that happens.
Yes. IRS reconfigures your taxes, you want to find out why because they’re doing it for a reason. Usually, it’s because somebody sent a 1099 or something was reported underneath your social security number, and it could be incorrectly reported. It could be a transcribed number. It could be somebody that was just wrong. Maybe they gave you a gross number instead of a net number.
There are a number of reasons. But sometimes the IRS gets bad information, and you just want to see what their information is. Then you meet with the agent to determine whether or not they’re taking a position that’s contrary to yours and whether you can rectify it, then you get to go to the office of internal appeals. If you still don’t like what they’re saying, then you go to the tax court.
I’ll tell you this, if you go to tax court, they do not want you in tax court. They absolutely want to settle these things if humanly possible, unless it’s something where they really do need court guidance. Like I don’t know if it’s A or B. Nobody knows whether it’s A or B. Hey, court, will you tell us whether it’s A or B?
Eliot: The courts go to the law clerks to do the research.
Toby: Yup. You clerks for judges. I clerk for judges. You should not be listening to what the law clerks say for the most part. You shouldn’t be listening with the judges.
All right. “After cost segregation, how long do we need to hold the property? Is there a hold time restriction to sell after cost segregation, or can I sell the property after cost segregation and do a 1031 exchange for tax-deferred?”
Eliot: I really like this question because you’re going to hear a lot of stuff out there. It should be this long, common sense is this long, or whatever. The reality is the code doesn’t say anything. There’s no time given for how long you have it. You just have to have it in a trade or business or as an investment.
Toby: Yeah, and I will say this. If you cost seg a property and you sell it, and let’s say you did it after one year, you’re going to have four years of recapture on the five-year property if you bonused all of it. You’re going to have 14 years of recapture on the 15-year property. You’re going to have six years of recapture on the seventh. That recapture is taxed as ordinary income.
That’s number one. There could be a tax implication. But if you 1031, don’t worry about it. If you have an investment property, there’s nothing that says I can’t cost seg it and roll it into another property. Just know that if you do, you need to keep the same tax methodology. In other words, you have to cost seg the new property and write off its 1245 property separately from its 1250 property.
Somebody says, “By the way, my IRS tax auditor spelled his title wrong. He wrote, opersations manager.” You still had to pay an arm and a leg after his audit. Opersations, that’s mean.
Eliot: That’s everybody this time of year in taxes.
Toby: I misspell my name half the time at this point. Sometimes I’m just lucky to be OC. I’m like, Toby, you misspelled your name again. Spell check. It just says, Hefe. Keeps going to El Hefe, I don’t know why.
All right. “This is my first year in business, so I have not filed the […].” Oh, somebody’s already answering that. By the way. I just want to say a big shout-out to Troy who manages our bookkeeping department, Dana, Matthew, Patty, Ian, Piao, and Christos who have been answering questions. There are 125 written questions that have been answered, which is pretty amazing.
I have to say, give props where props are due. Those guys are in the middle of tax season and they’re doing this. They get a big star. You don’t realize how bad tax season can be. You’re tax professionals. It has been so tough dealing with the IRS.
I know that the Inflation Reduction Act gets made fun of because it doesn’t really stop inflation. We’re going to have 87,000 new agents or whatever. We need investment into the IRS. I got to tell you as a tax professional. I don’t know if you feel the same way.
We need more people working for the IRS that could actually help because you can’t get a question answered half the time. It took us about a year to get a paper return response. They would take your check and then they would say you still owed the money. It’s absolutely catastrophic what’s going on in that place.
I don’t begrudge the money. I do begrudge that if they’re going to give it to a bunch of examiners to audit poor people, I think that sucks. That’s who they audit, by the way. The vast majority of audits are people that are working-class or lower. It sucks. They shouldn’t be doing it, but they get a good return on their investment when they send out those letters and audit the earned income tax credits.
The people that are making $25,000 and below, they can’t afford an account to fight it. They’re usually scared to death of the IRS, so they just pay it, versus the folks that can have guys like us who defend them. It’s a completely different animal.
All right. If you guys like tax knowledge, if you like this type of information, please go in there and subscribe to the YouTube channel. Patty always shares out the link. We also stream Tax Tuesdays. If you want to watch it in a different format, you can go to YouTube and watch it. You could also watch the videos there. There’s a ton of stuff.
We put about three videos a week, usually two at least, three sometimes. I’m always trying to pick topics. You can always help me out. One of the things you can do is go to firstname.lastname@example.org and let me know what topic that you want me to do, a deep dive into, and ask your questions. This is where we pick our questions.
We get them. We get about 500. I just randomly go in, it’s usually like the top. I literally look at the top bunch of questions and I’ll be like, oh, those ones all look good. Just grab them and throw them in, just make sure that they make a little bit of sense.
You could always go in there and ask your questions. I personally think that one of the most beneficial use of your time is to learn these rules. It’s not necessarily you that you might be helping. It maybe somebody that you care about, maybe somebody that you meet, maybe a friend, maybe a family member, or somebody else where you just say, hey, you know what, you might want to look at this. I heard you might be able to do something that can help yourself. Big, big difference.
Especially in the years like now, if you don’t realize that the wash sale rule doesn’t apply to crypto, so you can sell your crypto and immediately buy it back, have this huge capital loss, offset a bunch of your capital gains, especially if you had to sell some property or sell stock during this last year. Maybe you took a bunch of winners and your financial professional said, we’re out of the market and dumped it and you have all this gain. There’s a freebie to help offset it.
It’s just knowing little things like that so you can better yourself and you don’t get smacked with the tax stick. Anything from you, sir?
Eliot: I think we’re determined next time, it’s going to be with some bookkeeping element to it.
Toby: Yeah. What we’re going to do next Tax Tuesday is a bookkeeping special. If you have bookkeeping questions specifically, send them on and say, I have a bookkeeping question that’ll help me identify that as a bookkeeping question. I have no doubt that we have a ton already in there.
If you do the Tax Tuesday next time in two weeks, we’re going to have Troy Butler on. We’re just going to focus like a laser beam on books and records because your P&L and balance sheets actually matter. In fact, the more time that you spend on those things, the better off your business is going to be because it’s going to tell you the actual financial health of your business as opposed to guessing and waiting until the end of the year. Or like me, six months after the end of the year, like, okay, let’s make sure my books are actually done.
You want to actually kind of be doing this stuff as you go so you can get a good idea of the health of your business because there’s nothing worse than that surprise of like, hey, I ran out of money, I wonder why. That kind of sucks. It has a chilling effect on your weekend activities.
All right. There are still a few questions that are open. We’ll continue to answer those. But in the meantime, I just want to thank everybody for joining us for Tax Tuesday. We will see you in two weeks. Anything else?
Eliot: No. Thanks for letting me attend. We’ll see you again.
Toby: Eliot kicks some hiney. He does a great job. I just want to say thanks to Eliot. Thanks to the whole team for doing another Tax Tuesday. You guys do a fantastic job. Thanks, guys.
Eliot: Thanks to the clients.
Toby: Yeah, absolutely. Without you guys, we’d be talking to ourselves.
Eliot: Which we used to do anyway.
Toby: All right.