Posted by Frank Chin on December 02, 2006 at 17:07:02:
Thanks Dave and I always read your posts.
BTW, they should keep your reading list permemantly posted somewhere.
Frank Chin
Flip-n-Fix, and Tax write offs? - Posted by Mark
Posted by Mark on December 01, 2006 at 20:34:50:
Hey All! Mark Davis here.
I have a question:
I know that when you own rentals you can have a lot of Tax “Write offs”. Are there write offs on Fix-n-Fips? If so, what are the most common? I have decided that I will be doing Fix-n-Flips instead of Rentals. I may do rentals later, but not now. I am kind of afraid that I may get a bad renter, or worse a rental that stays vacant alot. I just can not afford a rentals house notes and my personal notes. I feel that with fix-n-flips I can make money easier, and put back a little for rentals that I may get later. I had read on CRE site that Fix-n-Flips are one of the best ways to start with. Is this true?
Re: Flip-n-Fix, and Tax write offs? - Posted by speednxs
Posted by speednxs on December 02, 2006 at 24:42:55:
You want to be very, very careful about the difference between tax deductions and capitalized expenses. I have an accountant do this stuff for me, but I will try to give you an idea of some considerations. Definitely get an accountant and listen to his advice. If an electrician replaces a bad breaker in my rental and charges me $200 for a repair, I can deduct that as an expense in the year it occurred. If an electrician replaces a bad breaker in a house that you are fixing up for (flip) re-sale and charges you $200, you may have to capitalize that as an expense. It adds to your basis, but it is not a current year deduction if you don’t sell till the next tax year.
Look at IRS pub. 551 page 3, sub-section headed “constructing assets”.
You then may be characterized as a flipping real estate “dealer” and have to pay self employment tax (FICA) and medi-care. As long as you are doing that you may want to set up an S-corp.
So you should do a little research on the business aspects before you jump into this. If you understand the tax forms you will have to fill out to flip a house, you have a good start.
Have fun painting the baseboards!
Re: Flip-n-Fix, and Tax write offs? - Posted by David Krulac
Posted by David Krulac on December 01, 2006 at 22:23:29:
all the money you spend on materials, paid labor (not your own), taxes, insurance, utilities, advertising, transporation, tools, etc. etc. etc. are all tax deductable for BOTH rentals and flips.
The differences are that wiht a rental you can take depreciation over 27.5 years for residential AND that when you sell you can take long term capital gains for proeprty owned for 1 year and 1 day. Flips can’t be depreciaited nor can you take LTCG.
Question on Recapture - Posted by Frank Chin
Posted by Frank Chin on December 02, 2006 at 07:29:56:
Dave:
You answered a question about recapture a week or so ago, about recapture not applying to depreciation only taken before 1995 or 1997 (don’t recall which). I can’t find that post right now.
How sure are you on it???
I bought a property back in 1982 or 1983, did 15 year ACRS on it, practically depreciated the whole place by 1997. I think my CPA recaptured everything. I sold it a few years back, 2001 or 2002 I think.
I guess I can amend tax returns?? but I don’t want to bother my CPA with it unless I’m sure, and make a fool of myself. I think I depreciated 100K on the place, and if recpature is not warranted, I guess I might get a few dollars back, maybe 25k??.
I was going to find your post, then dig out my old returns. Are you due a commission??
Frank Chin
Why don’t you check with the IRS? - Posted by Merez(IA)
Posted by Merez(IA) on December 02, 2006 at 10:04:27:
Well, I’ve never heard of recapture not applying to depreciation taken before a certain date, nor have I ever seen an mention of it on multiple REI websites and forums (creonline included), except for the one post by David Krulac.
Nor could I find anything on the IRS website. I look at Publication 544 and the instructions for form 4797. It looks like for section 1250 property (which most resident rental real estate falls into) you compute the recapture on depreciation taken or on the calculated additional depreciation. I see no special exclusion of pre-1995 (or 1997) depreciation. However, I’m more than willing to chalk this up to as a learning experience if someone can prove me wrong by pointing out a reference on the IRS site.
Also, you can only amend a return within 3 years of the date of filing the initial return or within 2 years of paying the tax due, whichever is later.
Re: Why don’t you check with the IRS? - Posted by Frank Chin
Posted by Frank Chin on December 02, 2006 at 12:26:58:
Merez:
I’ve looked thru the publications, and I haven’t seen a date mentioned to start recapture. I own several properties since the early 80’s, with 15 year depreciation, that I did most of my depreciation before the mid 90’s. You can see why it’s worth my while to really check it out.
I also see there’s a 3 year limit on amending returns, and I might be out of luck with the the return I did file. I’ll check with my CPA. If Dave is right, I might have paid 25K too much.
Frank Chin
Re: Why don’t you check with the IRS? - Posted by randyOH
Posted by randyOH on December 02, 2006 at 13:00:16:
Frank,
This is a terminology problem. When the tax law talks about “depreciation recapture,” it has to do with how your gain on the sale of the property is taxed (i.e., ordinary income or LTCG). It has nothing to do with the amount of the gain. So, if the tax law says there is no recapture, it just means that all of the gain is taxed as LTCG.
What you are talking about in your question (I think, correct me if I am wrong) has to do with reducing the basis of the property by the amount of depreciation you take. When you depreciate an asset, you have to reduce the basis. This is not “depreciation recapture” and there are no exceptions to this requirement.
So bottom line is you did not overpay your taxes because you used the depreciated basis to calculate your gain. Now you may have overpaid if you reported part of your gain as ordinary income because of the depreciation you took.
HTH,
Randy
Re: Why don’t you check with the IRS? - Posted by Frank Chin
Posted by Frank Chin on December 02, 2006 at 17:04:37:
Randy:
I see what your mean. When I saw Dave’s comments the other week, I saw dollar signs, and ready to spend those dollars on a cruise.
Guess no cruising for me. LOL
Frank Chin
Re: Why don’t you check with the IRS? - Posted by David Krulac
Posted by David Krulac on December 02, 2006 at 13:27:46:
there is a possible overpayment on the differential between the Federal Recapture rate of 25% and the LTCG rate of 15%. But it would only be on depreciation taken before 1997.