On the show today we take a… Deep Dive into Real Estate Taxes & Accounting with Natalie Kolodij!
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Show Links:
– Kolotax.com
– Podcast 63 for Legal Wholesaling
– Alex Belisle Broke is a Choice podcast
Show notes for Deep Dive into Real Estate Taxes & Accounting with Natalie Kolodij
The Vantastic Life is…
– is on the Big Island of Hawaii!
Welcome Natalie Kolodij (Kalady), who’s in Charlotte North Carolina. Julie is in Seattle Washington. And Joe is on the Big Island of Hawai’i.
Sansai Sushi on Maui is one of the best sushi places Julie has ever been to!
Julie
Natalie is a super smart person who knows a ton about investing AND accounting!
Where are you located
Natalie
Charlotte NC, and I picked this because it’s a great real estate market and close to cruise ports. I like to go on a lot of cruises :-).
Joe
Give us the goods. Pretty much your whole life story! 🙂
Natalie
I knew that I wanted to get into real estate, but I didn’t know how. There was a real estate guru that was coming through town, and ended up paying for the 2 day course. And I will advise against that, there are so many better ways to get involved in real estate.
I don’t advise it, but if it gets you started… then I guess it’s not a bad thing.
Julie
We’re you already an accountant when you went to that event?
Natalie
Yes, I knew I couldn’t keep working 100 hour weeks.
I remember that during the lunch break at the event they asked us to get an increase of our credit card lines. It was very predatory.
Then I went to a local meeting and learned WAY more!!!
Julie
Well, can you write off that big education amount?
Natalie
Actually you need to be in the business before you can write it off. So, do one deal, or get started before you go and pay big bucks on real estate investing education.
Julie
Wow! I have never heard that before from any of the big gurus!
Let’s talk about the different entities for real estate investing. What are they?
Natalie
This is the question that I get more than any other. And it’s actually a legal question. But me and your attorney will probably tell you two different things. But you should talk to both your accountant and attorney.
Julie
It’s amazing how personal all of this stuff is! You really need to back into it for your personal situation.
Natalie
It’s a topic that… depends on your personal situation.
But you’ll see on forums saying that some kind of entity worked for them, but that doesn’t mean that it’s going to be right for you.
It’s really all over the board!
One of the biggest misunderstanding is the single member LLC. If you are the only person on it… the IRS ignores it. You do need to keep separate books, but it’s pretty much the same as your personal.
If you add a second person is where it can get tricky. It creates you a partnership, and now you have two tax returns. But in WA there is a weird exclusion to that. If it’s just you and your spouse… you don’t need to file two returns. Because WA views married couples as one entity.
Julie
So, we’re zeroing in on extra tax bills.
What would a lawyer say in regards to that?
I had a single person LLC that had a condo building on it, and I was worried because I was using a special strategy for this. But are you using your person social on that?
Natalie
You can have an EIN. But the issue is that people break that corporate vail when you pay for business things personally, or personal things with your business.
You want to make sure it’s all separated.
Julie
So, aside from that… what else are we talking about?
Natalie
At this point there’s no tax difference. Having an LLC does nothing.
With your rentals you would put them into single member LLC’s or partnerships. I would warn you about S-Corps or…
Always talk with your tax professional before doing anything.
Keep your rentals out of S-Corps, and in separate LLC’s. Otherwise we can’t maximize tax strategies.
Julie
I bet people are screwing this up.
Natalie
Yeah, and it can be ok, but there are some things that can get messed up.
Julie
Take notes on great questions to ask you own accountant to see what’s up.
Are you available for hire in WA state?
Natalie
Yep, I work with clients all over the US right now.
Julie
Most people think they need to get the S-Corp because of the self employment stuff, right.
People don’t think about how different entity structures will effect different things.
What are you doing when you need to refi your rentals?
Natalie
When people do this they are usually quit claiming. If you are trying to go from an S-Corp to person that can trigger a tax event. Potentially.
Almost no one should start with an S-Corp. The gurus get this backwards. And people come to me with a bunch of different entities that they don’t need.
You should grow into the entities that you need, and not the other way around.
Julie
So can you start with your LLC’s and then elect to do an S-Corp when the time is right?
Natalie
Yep. I usually recommend that people have one or two LLC’s depending on what their strategy.
An S-Corp is just an add on to your LLC. So you can start with an LLC and then add on the S-Corp. If you start with it from the beginning it’s probably going to cost you more. If you’re going to make less than $50k in the year.
Julie
Maybe you guys should just call Natalie and run all of this buy her first.
What do you see for real estate brokers?
Natalie
That’s a hard case of it depends.
If all of the income coming into a corp is from a commission that can been seen as an income. You have to look at the local state and see what has happened there.
Julie
Man, good stuff! We could go on and on!
The new 199a deduction in rentals.
Natalie
What this is part of the tax cuts and jobs, and to keep this fair, to make up for this, if you have a pass through entity, we’re going to give you this 20% deduction.
A lot of CPA’s got this really wrong.
Basically, is a rental a business?
Your rental can be a business even if you’re not a real estate professional. There are cases when a family only owns one single rental.
You need to participate in something with the intent of making money. Basically, trying to make profit and being smart about it.
There was a lot of confusion about this, so the IRS released a safe harbor to check a box to see if you qualify.
The easy out if far worse for investors. My advise is to ignore the safe harbor. If your tax professional told you that you didn’t qualify kick them to the curb. You don’t need the safe harbor.
Julie
What if people are realizing that they want to do a revised tax return?
Natalie
You can revise your returns for 3 years. So, you can do that.
I can tell you what lines to look at on your returns.
For this deduction for rentals.
Schedule E only for rental income
Very bottom line 26
If that number is positive you should qualify for this
If you go to 1040 on line 9 it lists the qualified income
If you have a positive number there you should qualify for the deduction
Julie
Do you have to track the hours and your stuff?
Natalie
Only if you’re going by the safe harbor.
If you can just prove that you are regularly involved for the intent of profit.
There are a few extra steps you need to have a formal business plan to back your stance. And you might need to send out 1099’s if you have a contractor that does services over $600. This is a good idea.
Julie
I have a side business product for you to sell. So RAD!!!
Let me ask you… we are ideally able to ignore the safe harbor.
Who are the people that need to stick to the safe harbor?
Natalie
I would say never.
If your rental is a business, it’s a business.
Julie
What about AirBnB?
Natalie
When you rent part of your primary home, shared space. Then we need to look at it a little more.
If it’s a separate space, then that’s easier.
If you’re treating it like a business, you have a better chance of defending this.
Julie
Would a co-living and regular business plan look different?
Natalie
I think every business plan should look different.
Julie
What are some top mistakes?
Natalie
The big one was the 199a, so check those two lines on your taxes.
On schedule E there’s something that says fair rental days. A lot of accountants are lazy and put 0 or 365, so you need to make sure this is accurate. This will help you for lending.
Depreciation- when your rentals first setup. The depreciation only applies to your building for 26 years. I see accountants not separating the land the building. You might be depreciating too much. The tax is due if you take the depreciation or not. So you want to absolutely take depreciation.
Julie
Good stuff!
Do you know any good tax appeal people in WA?
Natalie
I don’t.
Julie
We were talking about amending returns?
Natalie
Basically with depreciation, if it was done wrong for one year, we can fix that. If it was multiple years, you have to submit some specific forms, and should contact a tax professional to do that.
Otherwise this will give you headaches down the road.
Julie
If you’re a private lender do you need to issue a tax doc?
Natalie
The IRS doesn’t allow an interest free loan, so they are going to input an interest element. The person doing the financing, if you’re doing this as a full time business, they need to issue the 1098. But if you are just doing some loans here and there you don’t need to, but could.
Julie
What about your rental losses?
Natalie
Rentals are passive ,and your job is active. Normally you can’t combined the two. Unless your income is less than $150k/year you can use some of the losses.
One the losses never just disappear. If you invest in a syndication you can use the losses.
When you sell your rental the losses become available.
Julie
So awesome!!! This is life changing stuff!
If you’re investing in a syndication or something like that and when the property is purchased a recourse loan is in place. If there is a tax loss, but there is a recourse loans that you didn’t have to sign on yourself. Are you able to use that loss?
Natalie
Those would get captured and rolled forward.
Julie
I could ask about 10 more question here, but were are going to start to wrap up.
But one more thing.. Are you a dog lover?
Natalie
YES, I have a bulldog that’s snoring right here next to me!
Julie
If you are dog lovers, follow Natalie.
Natalie
I foster dogs. The goal is to find a good home.
Julie
Do you have any good resources?
Natalie
Alex Belisle Broke is a Choice podcast
Julie
Thank you so much!!
Skagit, Redmond, and Burien masterminds are weekly, and Kitsap coming soon!
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