Stay ConnectedHey there, fellow real estate investors, FIRE enthusiasts, and tax aficionados! Welcome to “Real Estate is Taxing” – your go-to weekly podcast for all things real estate taxes, hosted by Natalie Kolodij, EA- Real Estate Tax Strategist and dry humor extraordinaire.
Each week, we’re breaking down complex tax topics into bite-sized, understandable explanations, with no regard for how many obscure references it takes to get there.
Copyright: © 2024 Natalie Kolodij, EA
If you've considered attending a cruise that relates to your business-you won't want to miss this episode. Learn the ways you can and can't write off a cruise as a business expense.
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[00:00:00] Welcome to Real Estate is Taxing, where we talk about all things real estate tax, and break down complex concepts into understandable, entertaining tax topics. My name is Natalie Kolodij, I'm your host, and I am so excited that you've decided to join me.
[00:00:23] Hello. Hello everyone. And welcome to this week's episode. The past several months, I have attended multiple conferences, tax conferences, real estate conferences, all across the country. Various venues. And it got me thinking about one of my favorite travel business topic. Overlaps. Which is when you can and when you can not. Deduct travel on a cruise ship.
[00:00:53] There's a lot of blogs and articles out there, but they're all fairly vague or they give very [00:01:00] generalized steps and don't really talk about the feasibility of it. Or actual examples of it. I spent some time today searching for some court cases related to this topic. And there really aren't any specific to cruise ship travel as its own deduction.
[00:01:19] I couldn't find it as a focus point of a case. I did find some court cases that were semi-related we'll chat about one of those at the end. But outside of that, there's not a ton of guidance because it's pretty cut and dry.
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[00:01:34] The code section for this hasn't changed since 1982. So there haven't been any big updates or anything that really needed to be contested in recent years. So let's get into it. There are two different ways you can potentially write off a cruise as a business expense. Both of these are covered in code section [00:02:00] 2 74 M and they are split between addressing conventions on cruise ships. And then a secondary category known as luxury water travel. So starting off with conventions on cruise ships. This is something that I hear about pretty often. I think anyone in the tax industry and real estate in a lot of industries, There are multiple cruises per year related to most industries that you can choose to attend.
[00:02:33] It will be in most cases, a seven day cruise. They will buy a room block the same way they would for a conference at a hotel or a resort. And then everything takes place on the cruise. There are however many hours of education. There are, different conference related events and networking.
[00:02:51] They're renting out general speaking areas. And attendees pay for the room. And the cruise fare, it's all typically rolled [00:03:00] into one price. So these are marketed pretty frequently. And I have most often seen these marketed as a deductible business expense. But the truth of it is very rarely. Is a conference or an educational event on a cruise ship. Going to just easily be deductible. So let's start off with the first. Addressing of this.
[00:03:29] So let's look at how the code words, this. In the case of any individual who attends a convention, seminar, or other meeting, which is held on any cruise ship. No deduction shall be allowed under section 1 62 for expenses allocable to such meeting. Unless the taxpayer meets the requirements of paragraph five. And establishes that the meeting is directly related to the active [00:04:00] conduct of his or her trade or business. So code section 1 62. Is the part of the tax code that explains ordinary and necessary business expenses. As a starting point, attending a convention seminar, et cetera, on a cruise ship. Is only a business deduction. If it directly relates to the taxpayers ongoing trader business, that makes sense. Next part. Again, it is directly related to the active conduct of his or her trader business. And that, and then it goes on to list two requirements. Requirement number one, the cruise ship is a vessel that is registered in the United States. And requirement number two. All ports of call of that cruise ship are located in the United States or in possession of the United States.
[00:04:53] So when we just start off with looking at these two initial requirements, I will [00:05:00] let you guess how many cruise ships you think fit the bill? If we are looking at large commercial cruise lines. there's a thousand, 2000 people on board, maybe more. It normally is a week long, goes out to a few islands, go somewhere else. But we're not talking about like a river cruise or one of those little boats that'll fit like a hundred to 300 people, But one of those large commercial cruise ships, where there is a buffet and like a kid's club and water slides and all of that. One we're looking at that level of cruise ship. There is one. Singular ship that meets the requirement. Norwegian cruise lines, pride of America based in Hawaii is us registered. And it is the only large commercial cruise lines, cruise ship. That is us registered. Most cruise ships are registered to other countries for a variety of reasons. So just right off the bat, most cruise [00:06:00] ships are not going to meet this requirement. The vast majority of cruises and cruise ships do not check the boxes. To be able to write off a convention or seminar that is held on a cruise ship. If it did, let's say that. Your industry is hosting a cruise that goes to Hawaii on that pride of America cruise ship. So it is us registered and it is only going to the United States.
[00:06:28] then there is a $2,000 expense limit. For the total cost of that cruise with that seminar or convention. Total expense CAPTA, $2,000. In addition to that, if you happen to find a cruise that ticks all of the boxes and does qualify. To write off as a convention or an event that is held on a cruise ship. There's a whole bunch of reporting requirements that are required as [00:07:00] well. for the tax year where you're claiming that deduction. You also need to include. A written statement. Signed by the individual attending the meeting.
[00:07:10] That includes information about the trip, the total days that excludes the transport to, and from the cruise ship. The number of hours each day of the trip where you devoted to only business activities. You need to include a program or schedule for all of the business activities or meetings. And any other information that might be required by the secretary.
[00:07:36] Additionally, you also need to include. A written statement signed by an officer of the organization or group sponsoring the meeting or the conference. And that has to include. A schedule of the business activities for each day, the number of hours, which you attended those business activity. And any other [00:08:00] information as might be required by the secretary. so for the amount that we are fed and marketed cruises that are a tax deduction and attending these seminars on a cruise that are going to be a write off, they're likely not going to be. And in the rare event, they are. They're a huge pain in the ass to include everything you need to on your tax return to claim that deduction. So that's not a very likely option.
[00:08:27] It's not my favorite option. But that's what we have for the availability of writing off a convention or a seminar that is specifically held on a cruise ship.
[00:08:39] The next option that I think is the far better choice. Is looking at your crews under the definition of luxury...
Join me as I dive into two real estate focused Tax Court cases from summer of 2024. There's always something interesting to be learned when it comes to court cases.
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TC Summary 2024-17
[00:00:00] Welcome to Real Estate is Taxing, where we talk about all things real estate tax, and break down complex concepts into understandable, entertaining tax topics. My name is Natalie Kolodij, I'm your host, and I am so excited that you've decided to join me.
[00:00:23] Hello. Hello everyone. Welcome to this week's episode. This summer has been a pretty good summer for tax court cases. And what I mean is that there have just been several that I specifically have enjoyed and thought were interesting. And that's because there have been a handful that relate to real estate.
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[00:00:46] Now I love anything court related. I love reading true crime books. I love listening to the podcast. So for me, Reading tax court cases is extra exciting. But even [00:01:00] if you do not find that as cool as I do. These are still something that you should hold at least a little bit of interest in. The tax code itself is very rarely black and white.
[00:01:12] There's a lot of room for interpretation. There's a whole lot of guidance and nuance that happens after the code is written. And the tax court results are really just one of those pieces of guidance. Reading these court cases. Really does give us fantastic insight to the way the courts have been leaning on some of these topics that are in that gray area. And when it comes to real estate, there's plenty of gray area that we love playing in with the tax code. So getting these more recent kind of thoughts from the tax court. Getting this feedback, seeing how they're viewing things.
[00:01:55] This is invaluable. What I have for you guys today. [00:02:00] Is two court cases that are both tax court summary opinions from this summer. So these are super recent from July and August. And both are related to real estate.
[00:02:11] The first case that I want to walk you guys through is from last month, this came out August 20, 24. This is TC summary, 2024 dash 17. Eason V commissioner. So this case was interesting because it deals with a topic that comes up pretty frequently when it comes to real estate in two different capacities. The first one being, if you pay for one of those 40, 50, $60,000 real estate guru courses, is it deductible?
[00:02:45] And when is, or isn't it. And the other part of the question being, if you are new in real estate. When does your business actually begin? When are you open for business where you can start writing [00:03:00] off? All of your costs that are incurred. So those were the two big questions that came up in this case.
[00:03:08] So this summary opinion relates to a couple who owned two rentals in 2016. One of them, they maintained as a rental. The second rental property they had sold by June of 2016. So at this point, they've got a little bit of real estate experience. They just actively got rid of half of their real estate business that existed, so to speak.
[00:03:33] So they've got one rental left.
[00:03:35] That same year. The taxpayer in this case. Lost his job. Close to the beginning of the year, the taxpayer lost his job. And the couple started looking into other ways they could supplement their income and other opportunities to help make up. For that last paycheck, they were used to getting. And one of the things they came across was real estate investing. So [00:04:00] they were already a little bit familiar with it and they had some experience with rentals, but they stumbled across an ad for a real estate course or courses that you could take. That would teach you how to invest presumably. In some capacity. The court case does not go into the details. Of exactly what was covered in that course or those courses. But what it does say is that the taxpayer and the spouse decided to invest in this And they spend $41,934 on two different courses from this same real estate. Uh, quote, education provider. So once they bought these courses, The couple, then went on to set up an S corporation. So they established an S Corp in July of 2016. And they got some business cards. They got some custom branded stationary. [00:05:00] But outside of that, Nothing else really happened. So there was no additional purchases of real estate. There were no proven efforts at marketing. For a real estate.
[00:05:14] There was no proven efforts at advertising that they were in the market to buy real estate. Really not a whole lot else happened after they set up this S corporation and bought some business cards. Also worth noting. Is that by 2018. So within a year and a half from when they purchased these large expensive courses. The company through whom they had bought the courses. Went out of business. So another piece to this specific case that was taken into account by the tax court. Was the fact that this couple did anticipate having this ongoing support and resources. And all of this training and the moon and the sun and [00:06:00] everything else gurus promise you when you give them $40,000. And by 2018. None of it was there.
[00:06:07] It had all disappeared. The company went under and they were now on their own.
[00:06:12] So the year in question. For this couple's court case is 2016. So 2016 is the year when, as a recap, they had one rental property. They had sold off their other rental. Husband lost his job and they paid 40,000 plus dollars to accompany for real estate education. They then set up an S corporation, got some business cards and stationary. And that was the extent of the business operations.
[00:06:44] in this case, there were a few key considerations. That were looked at. The first consideration. Is. Under code section 1 62. When is the taxpayer entitled to [00:07:00] deduct? An expense as a business expense that is ordinary and necessary. Like when is it rightfully able to be deducted? And a part of the wording to that code section. Is that it relates to ordinary or necessary expenses paid or incurred? During a tax year in quote, carrying on any trader business. Now a lot of businesses do not make money for their first few years.
[00:07:29] That's not uncommon. A lot of businesses lose lots of money for multiple years that does not make or break whether or not someone is operating a business. However, in this case. There was all of the expense with none of the income, but also none of the proven effort to generate income. And none of the provable attempts. To actually continue to operate a business after buying the course, setting up the company, buying some [00:08:00] business cards that was the end of their effort. So for 2016, This couple reported over $40,000 of expenses as deductible business expenses. But when the court went back and looked, they really had no proof. That a good faith attempt was made. To actually run or operate or carry on a trader business. Part of the reason why. Is that it was never clearly defined what this couple's...
Anyone with a 1065 Partnership or 1120-S S-Corporation should have bookkeeping in my opinion, but if you don't...this episode is for you. This is your head-start on getting everything together for your tax professional to file your 2024 business tax return.
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Introduction
[00:00:00] Welcome to Real Estate is Taxing, where we talk about all things real estate tax, and break down complex concepts into understandable, entertaining tax topics. My name is Natalie Kolodij, I'm your host, and I am so excited that you've decided to join me.
[00:00:23] Hello. Hello everyone. We have just made it past the first fall extension deadline. Any 10 65 partnerships or 1120-S S corporations were due on September 16th this year. So we've just passed that hurdle. And part of what I realized this year is that there are a lot of people who don't know they've created an entity.
[00:00:49] They're not aware that they have a partnership. I've talked about this before. Or there are people who create the entity, they create a partnership or they create an S corporation, but they don't really know. Or their tax professional didn't give them a good rundown on what the differences are, what is required for filing, and what will be different because you now have this entity.
[00:01:12] So if you are someone who has a partnership or an S corporation, and you do not have formal bookkeeping, you don't have full QuickBooks, you don't have a bookkeeper, then this episode is for you. So I will note if you are using Tessa for your rental properties and you have a partnership, this is not formal bookkeeping.
[00:01:33] It's not a true bookkeeping system or a true double-entry platform. So while Tessa is great for keeping track of a profit and loss, and just keeping track of your income and your expenses for a property, once you move into a separate tax return, once you move into a 10 65 partnership filing, there's more information we need to keep track of, and it doesn't do this very well.
Preparing for 2024 Tax Year
[00:01:57] For today's show, I'm going to talk through some of the differences, like why we need more information for these returns and what information you should start gathering now to help prepare for the upcoming filing for the 2024 tax year.
[00:02:18] So I'm trying to give you a little bit of a head start. It's quarter four, so you have time to either find and hire a good bookkeeper to help you get books before the end of the year or start gathering all of the information I'm going to talk about so that you have a jump on all of the information your accountant is going to need. If you go to a tax professional and they're not asking for all of this information, while they might technically be doing your tax return, they're doing it in the most surface level numbers on forms way possible.
[00:03:00] What kind of talk about that a little bit more. But I recently had a new client who went to a large well-known tax and attorney firm. And last year for their entity return, where they didn't have full books, they just had the client complete an organizer.
[00:03:09] So they just used whatever information he told them—whatever amounts for bank account balances, etc. They did not ask for any of the actual documents to check any of this. And if that's the case, there's close to a 0% chance your return is accurate.
Costs of Entity Creation
[00:03:27] So let's dive into it. Let's start off with what happens when you create a partnership or an S-corporation.
[00:03:35] The first thing that I want people to consider when they are creating a partnership or creating an S corporation is that this creates a whole new, additional tax return. So there's a whole separate filing. Even though something might not have changed with your business last year, you might've had two rentals and they were on your personal return, and this year you have two rentals and now they're in a partnership, there's a whole additional filing.
[00:04:05] Entities require more information. There's more we have to track, and there's more you have to do. So the first consideration I want you to be aware of if this is going to be your first year with a partnership or an S-corp is that it's going to cost more money if you go somewhere to have your taxes done.
[00:04:21] Now how much more it's going to cost, I can't say for sure because different firms, different locations, and different levels of expertise or specialization are going to impact that pricing. But like with anything, there's going to be higher-end and lower-end and everything in between. The same way you can get a steak at an Applebee's for $8.99, or you can go to a Ruth’s Chris and pay $89, it's across the board.
[00:04:50] The price point I most often see for entity preparation at better tax firms is going to be a minimum of $1,500 to $2,000 per return for just the filing.
[00:05:02] So keep that in mind when you're looking to create an entity or switch over to being a partnership or an S-corp. Kind of pencil in that ballpark number into your mind as an additional cost. And that number tends to surprise people when they have multiple entities. I think because the big picture price point can add up really quickly, and it's not expected.
[00:05:57] If you look at one of the commonly well-known self-prepare software online, you can do your own entity return. It costs $800 for you to do it yourself with their software or $1,750 for you to have one of their quote tax professionals do it for you. If it's going to cost you $800 just to do it yourself, if you're going to a firm and an expert is doing it for less than that, to me, that would be a little bit of a warning.
[00:06:00] I would just be a little cautious there.
Bookkeeping vs. Tax Preparation
[00:06:02] So now you're aware of the additional costs that can come into play for just the filing. What else might you run into? Well, the next consideration is that bookkeeping and tax preparation are typically separate engagements.
[00:06:50] So if you are expecting to give someone a pile of receipts and bank statements and all of that, and have them organize it into categories and make sure everything ties together, and then use that ending information of total costs for all of your different expense categories to then prepare a tax return, that is bookkeeping.
[00:06:50] So if they're starting with raw information that's not organized at all for the whole entire year, that's going to be an additional cost. That would be a whole separate cost. So be aware of that. If you do not have formal bookkeeping, you don't have QuickBooks and a bookkeeper, at the very least you will want to make sure you have the following information together ahead of time for your tax professional, unless you are also intending to pay for bookkeeping.
[00:07:00] If you don't want to do that, you're going to want to listen on because these are the bare mi...
September 16th is the filing deadline for S-Corporations and Partnerships that filed for a 6-month extension. In this episode we'll discuss what creates those entities, some options if yours may be late, and a few other nuances to make this week a little easier.
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Introduction to the September 15th (16th) Deadline
[00:00:00] Hello. Hello everyone. And welcome to today's show. So we are only a few days away from the extended deadline for entity tax returns. This deadline specifically applies to pass-through entities, which typically include partnerships and S-Corporations. Normally, this deadline is September 15th, but this year, because the 15th falls on a weekend, the deadline is technically extended to Monday, September 16th. While this is the extended deadline for entities, keep in mind that the extended personal tax return deadline remains October 15th.
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Entities Affected by the Deadline
[00:00:37] Today’s show is going to focus on the September 15th (16th) deadline—who it applies to, common misconceptions about it, and what your options are if you think you might miss this deadline. To start, this deadline applies to S-Corporations and partnerships, both of which are pass-through entities. These tax returns are typically due on March 15th. However, if you filed for an extension, you were granted an additional six months to file, pushing the deadline to September 15th (or 16th this year). It’s important to note that an extension to file does not mean an extension to pay any taxes owed, just like with your personal return.
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Recap: What Are S-Corps and Partnerships?
[00:01:18] Let’s quickly recap what qualifies as an S-Corporation or a partnership. Many people may not even realize that they have one of these entities. An S-Corporation is either a C Corporation that has elected to be taxed as an S-Corp or an LLC that has chosen to be taxed as an S-Corp. To make this election, you would file Form 2553. You don’t need to change your LLC into a corporation first—it’s a single step to make this election. On the other hand, partnerships are formed in various ways, but they typically involve more than one person operating the business. Even without a formal entity, if more than one person is involved, you may have created a partnership.
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Understanding Partnerships: Common Situations
[00:02:28] The other common type of entity that is affected by this deadline is partnerships. Partnerships can be formed in a variety of ways, but the most common is the general partnership, where more than one person operates a business, even without a formal legal entity. Additionally, any LLC with more than one member (a multi-member LLC) will generally be considered a partnership for tax purposes unless it has made a different tax election. This often surprises people, as they might set up an LLC and add a spouse or a business partner without realizing they’ve created a partnership, requiring them to file Form 1065, the partnership tax return. For example, if you and a friend create an LLC to invest in real estate and split the proceeds 50/50, you’ve inadvertently formed a partnership and must file the corresponding tax return.
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When a Multi-Member LLC is a Partnership
[00:03:31] This situation is particularly common with multi-member LLCs. Often, people will set up an LLC and add their spouse to it, not realizing that in many states, they are now required to file a partnership return. Another frequent scenario occurs when individuals join forces for a small business venture, such as a real estate deal with a friend, where they both list themselves as owners on the LLC. Without knowing it, they’ve created a partnership and will need to file Form 1065. However, there is an exception for married couples in community property states: if the only members of the LLC are you and your spouse, and you live in a community property state, you may not have to file a partnership return at all. Instead, you might be able to treat the LLC as a disregarded entity.
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Special Considerations for Married Couples in Community Property States
[00:04:27] If you are married and live in a community property state, and the only members of your multi-member LLC are you and your spouse, you might be able to treat the LLC as a disregarded entity, avoiding the need to file a partnership return. If you and your spouse are operating a business without any formal entity, you have the option of filing as a qualified joint venture. In this case, you would each report your share of the business income and expenses on separate Schedule C forms as part of your individual tax returns, instead of filing a partnership return. These are a few nuances where you might not be required to file a partnership return, but in most cases, having a multi-member LLC will necessitate filing Form 1065.
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Filing Deadline for Entities: March 15th or Extended to September 15th
[00:05:00] Remember, if you have an S-Corp or partnership, your tax return is normally due on March 15th. If you file for an extension, you get an additional six months, pushing the deadline to September 15th (or in this year’s case, September 16th, since the 15th falls on a weekend). Even if you file for an extension, be aware that this doesn’t extend your time to pay any taxes owed. If you haven’t filed yet, or if you’re not ready, it’s crucial to get your return filed as soon as possible to avoid late filing penalties.
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Importance of Filing on Time
[00:05:16] Even if you don’t have the money to pay right now, filing late and paying late is worse than just paying late. You should aim to file your S-Corp or partnership return by the September 16th deadline (or October 15th for personal returns), even if you can’t pay what you owe at the moment. Filing late can lead to significant penalties, so it’s always better to file on time and pay later if necessary. However, I understand that sometimes these things are unavoidable—whether it's because you didn’t realize you had a partnership, forgot to file an extension, or your books aren’t ready.
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Solutions for Late Filing: Rev Proc 84-35 (Partnerships Only)
[00:06:00] If you think you might miss the deadline for filing your entity return, there are a few potential solutions depending on your circumstances. One option, specifically for partnerships (this does not apply to S-Corporations), is the IRS Rev Proc 84-35. If your partnership qualifies under this procedure, you can request relief from late-filing penalties. The small partnership exception under Rev Proc 84-35 allows penalties to be waived if the partnership meets certain criteria and the late filing was due to reasonable cause.
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Rev Proc 84-35: Criteria for Penalty Relief
[00:07:00] Let’s go over the criteria to see if you qualify for penalty relief under Rev Proc 84-35. First, your partnership must have no more than 10 partners. Second, all partners must either be individuals or estates of deceased partners—no trusts, LLCs, or corporations as partners. Third, the allocation of income, deductions, and c...
Examples of the 121 Exclusion which showcase how small changes, can lead to huge tax impacts.
In this episode of 'Real Estate is Taxing,' host Natalie Kolodij breaks down the intricacies of the 121 exclusion, which allows homeowners to exclude a significant amount of capital gains on the sale of their primary residence. . She details various scenarios to highlight how specific timelines and conditions—such as rental periods, military duty, and temporary absences—affect eligibility for the exclusion. By understanding these nuances, listeners can avoid costly tax errors and optimize their exclusion benefits.
Transcript
[00:00:00] Welcome to Real Estate is Taxing, where we talk about all things real estate tax and break down complex concepts into understandable, entertaining tax topics. My name is Natalie Kolodij I'm your host, and I am so excited that you've decided to join me.
[00:00:23] Have you ever pulled into the McDonald's drive through at 10 40 in the morning on a Sunday to get McDonald's breakfast? Only to find out the location near your house stopped serving breakfast at 10 30, you just missed it. And you were so sure you had till 11 o'clock to get that. Amazing egg McMuffin.
[00:00:45] You've been thinking about all week. Imagine that feeling times a thousand or more. That's what today's episode is about. And the best way I could think of. To describe the [00:01:00] impact of when someone thinks they are going to qualify. For the full 1 21 exclusion and have up to a half million dollars tax free. Only to find out that the timing or the way they executed it fell a little bit short. On today's episode. I'm going to walk you guys through several different scenarios of the potential application of the 1 21 exclusion. And really point out the way a few key, little bitty timing impacts. Can lead to either a partial exclusion or in some cases, no exclusion at all. When this comes up, it is obviously something that people are pretty upset to find out. So hopefully hearing this episode ahead of time will prevent a few people from living through that experience. [00:02:00]
[00:02:00] And maybe this episode will also remind you to check the cutoff time for your egg McMuffin this weekend.
[00:02:06] You are the guardian of your own destiny. So let's get into things, manifest it, and to make sure we are not missing these crucial timing cutoffs.
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[00:02:16] If you knew me, you know, the 1 21 exclusion is a code section that I can talk about for hours and hours and hours, there is so much unique complexity to it. For today's episode, we are just going to break it down into a few simplistic parts. We're taking this at a thousand foot view. So that you can recognize the reason why these situations we're going to walk through will or will not work.
[00:02:43] And you'll be able to see how these small timing differences can create a huge difference in the taxable outcome. The 1 21 exclusion. Allows a taxpayer to exclude up to [00:03:00] $250,000 of gain or 500,000 if married. On the sale of their primary home, as long as they have owned and occupied it for two out of the most recent five years.
[00:03:13] The first nuance to break out. That will relate to today's episode. Is those two out of five years are actually a calculation to the literal day. So two years is actually 730 days. Five years is going to be 1,825 days. For simplicity, we're ignoring leap years. So it is a literal to the day calculation. That's why a slight misjudgment on when you should move or sell, et cetera. Can have a huge impact. The next piece to be aware of for today's episode is something called non-qualified use. In a nutshell, any time when [00:04:00] that primary home. Is used for something other than being a primary home. Those years are considered.
[00:04:06] Non-qualified use. And the gain related proportionately to those years. Typically can't be excluded under the 1 21 exclusion. Now this code provision didn't come into play until 2009. So any time of non-qualified use before that. Doesn't count does not come into play here. And there are also three key exclusions. To what is considered non-qualified use. The first one would be any rental use. That occurs after. The taxpayer's most recent use of the home as a primary residence. The second exclusion. Is if someone is active duty military. They can have potentially up to a 10 year gap. Due to [00:05:00] being active duty. Where that time, where the home is rented or not being used as a primary home. That does not count as non-qualified use. And the final exclusion. Is that a taxpayer can have up to a two year temporary absence. That can be disqualified from being non-qualified use.
[00:05:21] So if there's a temporary absence of. Two years or less. Due to a health circumstance or a job related change or some kind of major unforeseen circumstance. That two year or less window also does not count against the calculation for the gain as non-qualified use.
[00:05:44] Now that you are all filled in on the key items we need for today's episode. Let's run through these examples. In all of the examples I am going to walk through. We are assuming that the taxpayer [00:06:00] originally buys this property to be a primary residence the day they buy it, it is for the purpose of moving in and living in this house. So example one. Taxpayer purchases, the primary home. They own and occupy it for 730 days.
[00:06:21] And then. They decide to sell the residence. They have occupied it and owned it for two years or more. That's 730 day mark. So in this scenario, they would qualify for their full amount of the 1 21 exclusion.
[00:06:37] Situation too. The taxpayer purchases, a primary home. They own and occupy it for 720 days. And then they go to sell the home. Because they were shy of that 730 day mark. The amount of exclusion they qualify for is [00:07:00] going to be $0. That two year minimum. Is required unless there's an unforeseen circumstance. We're not getting into that in today's episode. So if they just decided to sell because they wanted to, there was no other reason. If they have only lived in it for that 720 days. They don't get any part of an exclusion.
[00:07:26] There's no rounding. If they have only met that 720 day mark. Their entire gain is going to be taxable. There will be no 1 21 exclusion.
[00:07:39] So are you starting to see why these slight differences in a calculation can have a huge impact? Let's get into a few more tricky circumstances. In the next example. Let's say the taxpayer purchases, a primary home. They own and occupy it for [00:08:00] 750 days. They then move out and rent it for 1000 days. That's 750 days gets them that two year minimum of at least seven 30. And as long as they rent it for no more than three years. They don't have any non-qualified use and they still have their full 1 21 exclusion. Three years would be 1095 days. So in this example, because the taxpayer did occupy for the minimum of 730 days. And then they did not rent it for any more than three years or 1095 days. They can sell the home at the end of this and receive their full 1 21 exclusion. The only thing that will be taxable. Is, they will have, do have payback of the depreciation they took while it was a rental.
[00:08:53] There's going to be unrecaptured 1250 depreciation or some depreciation recapture. But otherwise. [00:09:00] That circumstance allows for a full 1 21 exclusion. The fact that it was ...
3 Common Mistakes When Issuing 1099 Forms
Episode 17: Hiring Your Kids: Tax Savings Strategy Or Really Risky Move
In this episode of 'Real Estate is Taxing,' host Natalie Kolodij breaks down the three common mistakes made by business owners when issuing 1099 forms. She discusses the misclassification of children employed in the business, the obligations of landlords operating rental properties, and the incorrect issuance of 1099s to owner shareholders who should be receiving wages.
00:00 Introduction to Real Estate Taxing
00:23 Common Mistakes in Issuing 1099s
00:44 Employing Your Children: Tax Strategies and Pitfalls
03:36 Landlords and 1099 Requirements
06:38 1099s for Shareholders: Avoiding Common Errors
11:20 Conclusion and Final Advice
Maximize Tax Benefits by Employing Your Children: Key Strategies and Pitfalls
https://www.incite.tax
In this episode of 'Real Estate is Taxing,' host Natalie Kolodij delves into the strategy of employing your children in your business.
She outlines the numerous benefits, including significant tax savings and the opportunity to fund a Roth IRA at an early age. Natalie also discusses crucial compliance requirements to avoid costly mistakes, such as treating the children as actual employees, paying reasonable wages, and issuing W-2 forms instead of 1099s.
The episode provides essential guidelines to help business owners implement this strategy correctly and reap the financial advantages.
00:00 Introduction to Real Estate Taxing
01:41 Why Employing Your Children is Beneficial
02:29 Tax Benefits of Employing Your Children
08:17 Common Mistakes to Avoid
13:50 Entity Types and Payroll Taxes
14:55 Proper Documentation and Compliance
23:59 Recap and Final Thoughts
How much should you be paying a tax professional?
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In this episode, we delve into the complexities of determining the cost of tax preparation and planning. Using a real-world example where someone faced a significant tax bill, we explore the core factors that influence these costs. We dissect the differences between tax preparation and tax planning, both of which can vary significantly in price. We also discuss the current shortage of skilled tax professionals in the industry, exacerbated by high retirement rates and the impact of COVID-19. Finally, we touch on how individual circumstances uniquely shape the cost of tax services. Tune in to gain valuable insights into why tax preparation prices can be so varied and what you can expect when seeking professional tax services.
00:00 Introduction: Shocking Tax Preparation Costs
00:28 Understanding Tax Return Pricing
01:44 Tax Preparation vs. Tax Planning
01:57 The Impact of Industry Shortages
07:01 Supply and Demand in Tax Services
14:49 Common Misconceptions and Translations
25:35 National Survey Insights
32:07 Conclusion: What Should You Pay?
Why Purchase Price Doesn't Matter When Deciding If You Should Do A Cost Seg
Tax Professionals-
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In this episode of Real Estate is Taxing, host Natalie Kolodij delves into the complexities of cost segregation studies. She explains what they are, their benefits, and crucially, when they should be considered by real estate investors. With detailed analysis, she outlines different scenarios, including how depreciable value and income levels affect the decision-making process. Natalie also touches upon practical considerations like DIY studies, professional studies, associated costs, and tax implications, offering a well-rounded understanding of this often misunderstood tax strategy.
00:00 Introduction to Real Estate Taxing
01:59 Understanding Cost Segregation Studies
03:51 When to Consider a Cost Segregation Study
04:13 Types of Cost Segregation Studies
04:51 Cost and Feasibility of Studies
06:17 Depreciable Basis and Property Value
08:59 Utilizing Losses and Tax Benefits
13:21 Special Considerations and Strategies
20:13 Conclusion and Community Invitation
When Renting Real Estate to your S-Corp leads to a deficiency $500,000+
The Gregory and Laura Schnackel Tax Court Saga: A Tale of Extravagance and Deception
Taxnotes Case Review:
https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/no-deductions-28000-month-condo-no-business-purpose/7kjhl
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In this episode, we delve into the dramatic and intriguing tax court case of Gregory and Laura Shackle as detailed in Tax Court Memo 2024-76. Gregory, the owner of an engineering and design S-Corp, purchases a lavish $3 million New York City condo, furnishes it with $300,000 worth of high-end items, and tries to pass off much of these costs as business expenses. Amidst extramarital affairs and questionable spending, Gregory fails to maintain proper records, resulting in significant penalties and tax deficiencies. Laura, with minimal involvement in the business, successfully applies for innocent spouse relief, while the courts determine the substantial amounts owed. This tale is a striking example of the potential fallout from attempting to misuse business write-offs, and the responsibilities that come with tax reporting, even when using a tax professional. The episode concludes with the fallout from Gregory and Laura’s divorce and the consequential financial and personal unraveling.
00:00 Introduction to the Case
00:27 Background of Gregory and Laura
00:38 Gregory's Business Ventures
02:57 The New York Condo Purchase
05:32 Questionable Business Practices
09:02 Luxury Furnishings and Personal Use
12:49 The Range Rover Purchase
15:41 The Affair and Financial Misconduct
17:56 Innocent Spouse Relief
19:07 IRS Penalties and Court Rulings
25:46 Lessons and Final Thoughts
Sign Up For 4 Websites To Earn Free AA Miles:
AAdvantage Shopping Portal: https://www.aa.com/web/i18n/aadvantage-program/overview.html
Simply Miles Portal : https://www.simplymiles.com
Surveys For Miles: https://www.milesforopinions.com
Unlocking Free American Airline Miles: Simple Hacks and Tips
In this episode of Real Estate is Taxing, host Natalie Kolodij shifts gears from tax topics to explore travel hacking.
00:00 Introduction to Real Estate is Taxing
00:27 Today's Special Topic: Travel Hacking
01:20 Earning American Airline Miles: An Overview
04:04 Method 1: Taking Surveys for Miles
05:38 Method 2: Earning Miles at Shell Gas Stations
07:09 Method 3: SimplyMiles Program
10:57 Method 4: AAdvantage Shopping Portal
18:42 Advanced Tips and Conclusion
Understanding Authority Hierarchy in Tax
Did you know the IRS isn't actually who makes tax laws? And IRS Publications aren't actual Authority? Let's find out who does and what is.
From Congress-created laws in the Internal Revenue Code (IRC) to U.S. Treasury regulations, court case rulings, and IRS publications, she explains the hierarchy and reliability of these sources. She emphasizes the importance of basing tax positions on substantial authority rather than simplified IRS guidance or social media information. Tax professionals are urged to be thorough in their research and not dismiss clients' internet findings outright, as they often contain elements of truth. This episode serves as a guide for tax professionals to better understand and utilize authoritative tax sources.
Introduction to Real Estate Taxing
Exploring Facebook Tax Groups
Understanding Tax Authority Levels
Internal Revenue Code: The Holy Grail
Treasury Regulations Explained
Judicial Authority and Court Cases
IRS Guidance and Its Limitations
Practical Advice for Tax Professionals
Conclusion and Final Thoughts
Mid-Year Tax Check-Up: Adjusting Your Withholdings
It's July! Time to review your paystub while you may be only halfway off track.
Drawing from a real case where a client's withholding dropped significantly due to changes in income and bonus structure, the episode offers a reminder to check the percentage of taxes being withheld from your pay. It advises taking a close look at recent pay stubs and the updated W-4 form to ensure accurate withholding, especially if any changes in employment or payroll processors have occurred. Key takeaways include checking if your withholding is under 10% and making necessary adjustments to avoid surprises at the end of the year.
00:00 Introduction and Purpose of the Episode
00:20 Importance of Mid-Year Tax Check-In
00:45 Case Study: Tax Withholding Issues
02:42 Steps to Review Your Withholding
04:20 Understanding the Updated W-4 Form
05:20 Final Reminders and Encouragement
Join me as we debunk some of the most common myths & misconceptions around taxes.
1. Myth: Tax Return and Tax Refund are Interchangeable
These two terms are often confused, but they are not the same thing. A tax return is the form you fill out and submit each year, like the 1040 form for most people. A tax refund is money you get back if you overpaid your taxes. Many people mistakenly say they're waiting on their tax return when they mean their refund.
2. Myth: You Need a License to Prepare Tax Returns
You don't actually need a license to prepare tax returns. While there are professional credentials like the Enrolled Agent (EA) or Certified Public Accountant (CPA), they are not required. All you need is a Preparer Tax Identification Number (PTIN) from the IRS to file tax returns electronically. Check your tax professional's credentials, as many practitioners are uncredentialed.
3. Myth: Living in a Home for Two Years Makes It’s Sale Tax-Free
Many believe that simply living in a home for two out of the last five years allows you to sell it tax-free. However, the IRS has rules regarding "non-qualified uses" for periods when the property was not your primary residence. Even if you lived in it for two years, gains related to earlier non-qualified use periods will be taxable.
4. Myth: LLCs Provide Tax Savings
An LLC is a legal entity and does not provide tax benefits by itself. If you set up an LLC and are the sole owner, it is disregarded for federal tax purposes. The taxes you pay and deductions you claim remain the same whether or not you have an LLC. Its primary purpose is legal protection, not tax savings.
5. Myth: You Don’t Need To Issue W-2 When Employing Your Kids
If you employ your children in your business, you still need to file W-2s and comply with all employer filing requirements. Just because their income may be non-taxable doesn't absolve you of this responsibility. Issuing W-2s also allows them to qualify for benefits like funding a Roth IRA.
6. Myth: Gifts Over $18,000 Cause Taxable Events
The $18,000 annual gift tax limit is just a threshold for when you need to file a gift tax return, not a trigger for tax liability. Taxes on gifts only become relevant once you exceed the lifetime exclusion amount, which is currently over $13 million. So, making gifts beyond $18,000 in a year does not mean you'll owe taxes.
7. Myth: Bonuses are Taxed at a Higher Rate
Bonuses are not taxed at a higher rate. They are subject to withholding at a higher rate, generally 22% or even higher if the bonus exceeds a million dollars. At the end of the year, your actual tax rate is calculated, and you may receive a refund if too much was withheld.
8. Myth: 0% Capital Gains Rate Only Determined By Gain Amount
The 0% capital gains rate applies to your total income, not just the capital gain itself. If your combined income and capital gains exceed the threshold, only the portion of income within that bracket qualifies for the 0% rate.
9. Myth: Income Below $600 from Self-Employment Isn’t Taxable
Regardless of whether you receive a 1099 form, all earned income from self-employment is taxable. If you earn over $400 in self-employment income, you are required to file a tax return, even if no single client paid you more than $600.
10. Myth: Moving Into a Higher Tax Bracket Taxes All Income at The Higher Rate
Only the portion of your income that falls within the higher tax bracket is taxed at the higher rate. For instance, if you earn enough to move from the 10% to the 12% bracket, only the income above the 10% threshold is taxed at 12%, not your entire income. This misconception often deters people from accepting bonuses or promotions unnecessarily.
Avoiding Accidental Partnerships in Real Estate
**Correction** : Hey everyone! I misspoke in this episode. The guidance on rev proc 84-35 references the old consolidated audit procedures that impact older returns. The CPAR (Consolidated Partnership Audit Regime) that impacts current returns does NOT impact the ability to use Rev proc 84-35 for late relief.
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Facebook for Tax Professionals: https://www.facebook.com/groups/realestatefortaxpros
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Electing out of CPAR: https://www.irs.gov/businesses/partnerships/elect-out-of-the-centralized-partnership-audit-regime
Small Partnership Late Filing Relief Rev Proc 84-35 : https://www.taxnotes.com/research/federal/irs-private-rulings/legal-memorandums/small-partnerships-are-not-automatically-exempt-from-filing-returns/1w8vn
Rev Proc Spousal LLC Filing as a QJV instead of a 1065: https://www.irs.gov/pub/irs-drop/rp-02-69.pdf
In this episode of 'Real Estate is Taxing,' host Natalie breaks down the common issue of accidental partnerships in real estate, explaining how they are often unknowingly created and the complications they bring to tax filings.
She outlines the key facts about partnerships, including the forms and reports required, and provides multiple solutions for managing these accidental situations, such as treating them as disregarded entities or qualified joint ventures. Listeners also get strategic advice on dealing with late partnerships and ensuring they do not fall foul of regulations. Natalie emphasizes the importance of understanding the tax implications when setting up LLCs with co-owners, which is crucial to avoiding unexpected tax complications.
00:00 Introduction to Real Estate Taxing
00:58 Understanding Partnerships and Form 1065
04:17 Common Accidental Partnerships
05:43 Solutions for Accidental Partnerships
14:47 Late Filing Relief and CPAR
21:34 Conclusion and Real-Life Example
Understanding Short-Term Rental Tax Loopholes: Key Court Cases and Revenue Rulings
Natalie discusses various court cases and revenue rulings that provide crucial guidance on this topic, including cases from 1965 to 2023. She highlights differing tax treatments based on the nature of services provided, whether the property is subject to self-employment tax, and the importance of understanding context to accurately apply tax laws. Tune in for a comprehensive overview of significant rulings and their implications for short-term rental property owners.
Link To Court Cases: https://www.natalie.tax/blog/strcases
FB Group For Tax Professionals:https://www.facebook.com/groups/realestatefortaxpros
FB Group For Real Estate Investors:https://www.facebook.com/groups/REIKnowledgeVault
00:00 Introduction to Real Estate Taxing
00:28 Understanding the Short-Term Rental Loophole
01:01 Court Cases and Legal Guidance
01:55 Debunking Myths About Short-Term Rental Laws
02:59 Case Study: 1965 US Court of Appeals
07:34 Revenue Rulings and Their Impact
13:06 Two-Step Approach to Analyzing Services
15:26 Exploring Substantial Services in Real Estate
15:52 Court Cases on Retirement Benefits and Real Estate
16:28 The Holohan v. Heckler Case Analysis
19:28 Comparing Substantial Services in Different Contexts
22:11 The Woodworth Case: Partnership and Self-Employment Tax
25:46 The Morehouse Case: Land Rental and Government Programs
28:34 Recent Developments in Short-Term Rentals and Tax Implications
30:39 Conclusion and Further Resources
Understanding Real Estate Audits and Proactive Defenses If You've Done a Cost Segregation
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In this episode of 'Real Estate is Taxing,' host Natalie, minimizes the fear around audits by highlighting their low risk and focusing on practical steps to avoid common pitfalls. Key points include detailed guidance on mileage deductions, maintaining thorough records for real estate professional status, and tips on conducting cost segregation studies. Emphasizing the need for detailed and accurate record-keeping, Natalie also discusses audit trends and offers solutions to common issues faced by real estate taxpayers.
00:00 Introduction to Real Estate Taxing
00:40 Understanding Audits in Real Estate
01:55 Mileage Deduction Tips
05:40 Real Estate Professional Status
10:17 Cost Segregation Insights
25:47 Conclusion and Final Tips
Cost Segregation Studies- What they are, how they're done, when to use them...and what type of study should you choose.
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A comprehensive exploration of cost segregation studies, detailing what they are, their benefits, types of studies, and cautionary advice. Also included are practical examples and IRS guidelines to help both real estate investors and tax professionals leverage these studies for tax planning. Stay tuned for all this and more, along with a teaser for an upcoming episode focused on potential pitfalls in cost segregation.
00:00 Introduction to Real Estate is Taxing
00:28 The Importance of Conferences
02:10 Networking Tips for Conferences
06:50 Cost Segregation Studies Explained
15:03 Types of Cost Segregation Studies
20:58 Important Considerations and Elections
30:37 Conclusion and Final Thoughts
And Why "You Can't Buy a Primary Home With A 1031 Exchange" Is wrong.
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In this episode of 'Real Estate is Taxing,' host Natalie Kolodij delves into the synergy between two tax code sections: the 1 21 exclusion and the 10 31 exchange. She explains the primary conditions under which each applies and explores scenarios where both can be utilized together in cases of mixed-use properties or properties transitioning between personal and business usage. Natalie also provides insights on handling depreciation recapture and answers common questions about using these provisions to maximize tax advantages. Join her for a detailed discussion aimed at demystifying complex tax strategies in real estate.
00:00 Introduction to Real Estate Taxing
00:52 Understanding the 1 21 Exclusion
02:04 Exploring the 10 31 Exchange
02:39 Combining 1 21 Exclusion and 10 31 Exchange
02:54 Mixed-Use Properties and Tax Benefits
05:04 Switching Between Primary Residence and Rental
10:04 Depreciation Recapture and Tax Strategies
12:39 Common Questions and Scenarios
20:14 Conclusion and Final Thoughts
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Referenced In This Episode:
TC Summary 2017-31 -https://casetext.com/case/nielsen-v-commr-2
In this episode of 'Real Estate is Taxing,' host Natalie Kolodij discusses the intricacies of real estate tax, focusing on depreciation and the importance of allocating land and building value when setting up a rental property. Natalie explains how depreciation allows rental property owners to write off the value of the building and improvements over time, emphasizing that land cannot be depreciated because it does not wear out. She outlines acceptable methods for dividing purchase price into land and building values. Natalie also debunks common misconceptions and provides guidance on ensuring accurate depreciation schedules.
00:00 Introduction to Real Estate Tax Education
00:27 Upcoming Tax Education Opportunities
01:40 Deep Dive: Depreciating Rental Properties
02:31 Understanding Depreciation: The Basics
03:21 Adding Costs to Your Property's Basis
04:07 Navigating Escrow and Loan Costs
09:38 The Importance of Separating Land Value
16:04 Choosing the Right Method for Land Valuation
21:27 Avoiding Common Depreciation Mistakes
27:20 Conclusion and Invitations
Demystifying the Short-Term Rental Tax Strategy
The podcast episode delves into the intricacies of leveraging the short-term rental 'loophole' for tax benefits, clarifying the often misunderstood and oversimplified strategy. It begins with an explanation of passive vs. non-passive income and the tax implications of each, particularly focusing on the limitations of deducting passive losses. The episode highlights how short-term rentals, under certain conditions, can be classified as non-passive, allowing investors to bypass these limitations. By maintaining an average guest stay of seven days or less and demonstrating material participation in the rental's operations, investors can take full advantage of this tax strategy. The episode further explores the role of cost segregation studies in maximizing depreciation deductions and the implications of bonus depreciation. Additionally, it addresses common pitfalls and audit risks associated with improperly implementing this strategy and underscores the importance of diligent documentation and adherence to IRS guidelines. The episode concludes with advice on operational considerations for those looking to explore short-term rentals as a tax strategy, emphasizing the need for careful planning and record-keeping.
00:00 Kicking Off with a Tax Conference Highlight
03:53 Diving Deep into the Short-Term Rental Loophole
04:57 Understanding Passive vs. Non-Passive Income
08:10 Maximizing Deductions with Cost Segregation Studies
13:10 Navigating the Challenges of Material Participation
16:16 Audit-Proofing Your Short-Term Rental Strategy
21:11 Navigating Depreciation and Cost Segregation for Tax Benefits
22:47 The Power of Short-Term Rental Tax Strategies
25:41 Managing Property Types and Depreciation Life
29:32 Understanding Mid-Term Rentals and Self-Employment Tax
33:25 Correcting Schedule C Misclassifications and Final Thoughts
This episode delves into the 121 Exclusion, also known as the primary home sale exclusion, which allows significant tax savings for Americans selling their primary home, assuming they meet specific criteria.
Covering the fundamental conditions of the 121 Exclusion, emphasizing the necessity of owning and occupying the home for at least 730 days out of the last 1,825 days to qualify.
Detailed explanations are provided for five common mistakes related to this tax provision, including misconceptions about rental use, house hacking scenarios, and the prorating of exclusions under unforeseen circumstances.
00:00 Introduction to the 121 Exclusion
00:47 Understanding the Basics of the 121 Exclusion
05:06 Common Mistakes with the 121 Exclusion
12:38 Special Cases and Exceptions in the 121 Exclusion
25:32 Conclusion and Final Thoughts
In this episode of Real Estate is Taxing, host Natalie Kolodij discusses the misconceptions about using rental property losses for those not identified as real estate professionals.
She clarifies that passive losses from long-term rentals can still be utilized to offset passive income, highlighting the tax advantages of rental income and explaining passive activity loss rules.
Finally, Kolodij teases a future episode dedicated to reducing or eliminating unrecaptured Section 1250 gain, inviting listeners to subscribe for more insightful tax planning tips.
00:00 Introduction to Real Estate Tax Insights
00:35 Debunking Real Estate Tax Myths
01:41 Understanding Passive Income and Losses
03:10 Maximizing Passive Losses: Strategies and Benefits
04:44 The Power of Depreciation in Real Estate
09:28 Navigating Passive Loss Limits and Opportunities
13:56 Planning for Future Tax Benefits with Passive Losses
18:15 Depreciation Recapture: What You Need to Know
22:36 Conclusion and Teaser for Next Episode
Natalie delves into the topic of tax extensions, clarifying what they are, their benefits, and various scenarios where filing for one may be advantageous. It begins by demystifying the concept of a tax extension, emphasizing that it's an extension to file, not to pay any owed taxes, and illustrating the procedural ways to file one.
The episode packs in practical advice, aiming to educate listeners on making informed decisions and optimizing their tax situations.
00:00 Introduction to Real Estate Tax Extensions
00:34 What is a Tax Extension and Why You Might Need One
02:48 Common Reasons for Filing a Tax Extension
04:31 Advanced Tax Planning: Retirement Accounts and 1031 Exchanges
06:50 Strategic Tax Moves: Cost Segregation and Superseded Returns
13:28 The Ultimate Tax Planning Flexibility with Extensions
14:05 Closing Thoughts and Advice
Introducing the Real Estate is Taxing Podcast.
The official trailer for the 'Real Estate is Taxing' podcast, hosted by Natalie Kolodij With a decade of experience in real estate and a professional background as a tax specialist, Natalie aims to share her wealth of knowledge on real estate taxes. She promises to break down complicated tax topics into understandable segments, focusing on strategies to avoid common pitfalls and minimize tax liabilities legally.
The podcast intends to provide accurate and engaging tax education, starting weekly from May 2nd.
00:00 Welcome to the Real Estate is Taxing Podcast!
00:15 My Journey into Real Estate and Taxation
00:45 Why I Started This Podcast
01:13 What to Expect: Breaking Down Tax Topics
01:33 Join Us and Make Tax Less Taxing
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