Accelerated Depreciation & The Real Estate Investor

Accelerated Depreciation & The Real Estate Investor


(energetic music) – [Toby Mathis] Investor owns
20 single-family homes in an eight-unit complex
in Florida, all rented out. Can we use accelerated
depreciation for things like a new roof, A/C, kitchen
and bathroom remodels? If so, what’s the
percentage and time frame? Alright, so let’s break that down. First off, you have 20 single-family homes and an eight-unit complex. You can use accelerated depreciation even if you don’t fix them up. If you fix them up you can
use accelerated depreciation but just remember what it is. You’re taking property
that is less than 20 years under a bonus depreciation
and taking it all in year one. So we’re breaking the
property into those pieces, so let’s take a look at the
items you just mentioned. New roof, that is longer than 20 years. A/C, that is going to
be less than 20 years, we can write that off probably under, depending on what type of property it is, we may even be at a 179 that way. We don’t really care about that, we’re just going to bonus depreciate it. Kitchen and bathroom remodels, depending on what you’re
putting into that bathroom and kitchen, yeah, like,
let’s think about this. You spend a whole bunch of
money fixing up that kitchen and inside it there’s appliances, inside it there’s fixtures
and things like that, all of that stuff, that’s not
27-and-a-half-year property, I’m going to be writing
that off right away. I’d still do the, like,
the appliances I’d do no matter what, cuz
they’re easy to break out. – [Jeff] Right. – [Toby] But everything
else that’s part of it I’d be breaking out,
I’d have somebody do it. What’s the percentage and time frame? The average is about 20
to 40% in the first year that you’re grabbing and
taking as bonus depreciation, which means what’s the average? Probably about 20% is less than
27-and-a-half-year property, it’s anywhere from 20 to 40%. What’s the time frame? We talked about that. You can go back, you can
grab depreciation you missed. You can actually do your 3115 election which is the change of accounting method that allows you to do the
accelerated depreciation, you could do that and you
can carry it back two years, or you could do it the year
of and carry it back a year. So yeah, that’s how it is. You can get a huge benefit. We love this. Did you see what that question was? – [Jeff] I did, Diane asked
in 2018 we had a personal rental property held in our own name, we created a new LLC
to a disregarded entity since just me and my spouse are on it, but did not get time to quitclaim it into the LLC in 2018, it
happened in early 2019. So in 2018 all the revenue
came to them personally, in 2019 for the first five months it also came to them personally. – [Toby] It’s not going to
matter whether they’re on it. – [Jeff] Yeah, it’s not going
to matter cuz we’re going to keep in mind this is disregarded, and I’m assuming that it’s
still disregarded to you. – [Toby] Yep. – [Jeff] So for tax purposes,
even accounting purposes- – [Toby] It’s not going to matter. – [Jeff] Nothing has changed. – [Toby] Nope, everything’s
going to come down to you. That’s actually not the
hard one though. (laughs) – [Jeff] Oh, did I read the wrong one? – [Toby] (laughs) I’m horrible. I’ll get fired today.
– You said Diane. – [Toby] I’m going to fire myself today. I know, I highlighted the wrong one and I gave you the one
that’s kind of this weird 59A-E for $4,800. It’s this weird thing on a
foreign partner and stuff, so we’ll get into that. So Diane, you’re good,
it’s not going to matter, it’s blowing onto your
Schedule E no matter what. Somebody else asked if a
disregarded subsidiary of a Wyoming holding partnership lends money, would it be considered business income? No, if it’s anything that’s a loan it’s not business income, and if it’s a disregarded subsidiary they’re treated as one
entity for tax purposes, you can’t loan yourself money. So Billy, you do not have
to do much with that, they’re going to be on one return which, just to give you an
idea of how weird it is, you could have 30 disregarded entities underneath a single LLC,
and you still only file the one tax return for the parent LLC unless that’s a disregarded entity to you, in which case it all goes to you. Kind of cool. Did you see what that question was, Jeff? – [Jeff] Yeah, 59A-E I believe applies specifically to corporations. – [Toby] Right, so here’s a question. They have a limited
partnership and they have a GP that is a C Corp at 10%. On my K-1 for the corp it shows box 20C in a statement on the LP return that says gross receipts for
section 59A-E for $4,800. That’s probably your 10%, right? – [Jeff] Yeah. But I don’t think it’s
going to apply to them. – [Toby] No. – [Jeff] Because they’re
a small corporation. – [Toby] Right, it’s letting you know what portion of that income would be used in that calculation, you
do not need to do anything. Why are they doing it? Because they have huge
corporations all the time and they’re going to be
checking that just to be safe so that that company knows
that that’s what they’re doing. – [Jeff] Yeah, so if
you’ve had a corporation that gets a K-1, this is not necessarily new. There were other codes that
only apply to corporations, and there’s codes that
only apply to nonprofits. – [Toby] Right. – [Jeff] It’s just information
they’re required to provide. – [Toby] And Robert responded,
the 10% is the $4,800 which means you made about $48,000 and 10% automatically goes
under the corporate books, then you don’t have to worry about it. Why do I have to do this
to sell my LP in corp? It’s just because they’re
checking a box just in case that hey, but it’s- 480, okay, he said he made $4,800. Yeah, it’s not going to matter. A, you should be expensing
that thing off pretty easy. Frankly, I’d probably make
the whole $4,800 disappear if you have a partnership there. So I’m not going to be
too worried about it, but I can see what he’s saying. They’re just doing a safety check, you don’t have to worry about it. They’re just basically, it’s
almost like the gentleman that had the LP return where it said that this is not
qualified business income, all they’re doing is letting you know hey, this is corporate, this is C corp income that would be used towards this calculation and you’re way underneath the calculation, so I wouldn’t worry about it too much, unless I’m missing something here. Somebody asks, I’m
entangled with a partner, a 50% owner on a title
in an apartment building where I put up 100% of the
funds for initial investment and the mortgage is in my name. The partner performs
the property management and receives the same monthly
cashflow proceeds as I do. How do you suggest I
divvy up for tax purposes? Well if they’re receiving a set amount, that’s called a guaranteed
payment to partner. I would just call that, well actually we’re going to
have to break this into pieces. If you are in a partnership then you’re going to
be hopefully controlled by a partnership agreement. If one partner is entitled
to a certain dollar amount then they would get that
as a guaranteed payment no matter what. So if you’re paying them
a property management, that would reduce the
amount of taxable income you would then have that’s
being split up amongst you. If what you’re saying
is that they’re working and their portion, because they’re working they get one-half of the income, that’s something completely different. Then they are receiving active income and you would be a
passive investor in that. So they would receive half of the income, you would receive half the income, their half of the income would be active for tax purposes. Do you see anything I’m
missing on that one? – [Jeff] No, it’s really important when we create these
partnership agreements that all of this is laid out, profit and losses, who owns what, because ultimately that
partnership agreement is going to determine much of this. – [Toby] Mm-hm. (upbeat music)

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