Rent your building to your business: CPA Advice in Scottsdale, Phoenix, or Paradise Valley

Rent your building to your business & reduce your taxes? Cost segregation Study could help

By Jeffrey Brooks, CPA, CFP, MBA for JBrooks Wealth Advisors, PC, a Professional CPA and CFP Firm 602-292-2009 Please consult with your professional tax CPA regarding your specific circumstances!


Here is a summary of a recent tax seminar I attended:

Rental Real Estate – Schedule E and Form 8582

Due to the NEW Net Investment Income Medicare Surtax, it is even more important that your rental property not make a large profit because the profit Could be subject to the 3.8% medicare tax. A cost segregagation study could help reduce your rental taxable income.

The old concern that rental income is subject to state and city rental tax has been eliminated if the business owner owns over 80% of the business and building LLC.

1. IRS cracking down on Schedule E.
2. If client sets up a LLC for a single member LLC and shows on schedule E you have to watch the mortgage interest. If the client gets a federal ID number you have to make sure that the mortgage interest statement showing the correct ID. If not you should show the interest under other interest.
3. Rentals are assumed to be passive except when:
a. Rented for 7 days or less (tools or vacations rentals timeshares)
b. Extraordinary Personal Services are provided (ie hospitals)
c. Rental is incidental to another activity (accountants rents space to another)
4. Ways to take as non passive (so can take losses from your business)
a. Active Participation
i. The taxpayer must participate in a significant way, such as by making management decisions or arranging for other to provide services.
b. Is the client a real estate professional? Why is this important?
i. Must devote 50% of personal services
ii. Must devote 750 hours
iii. Must materially participate in the rental activity.
iv. Can elect to aggregate all rentals into one activity. This helps to prove material participation.
1. Must qualify as RE professional
2. Applies for current and all future years
3. Failure to Elect means you need material participation in each entity.
v. Material Participation-Why is it important? So you can take a loss from real estate while having income from your business!
1. 500 hours in a year
2. 100 hours in a year and highest of any individual in the activity
3. Past history of meeting the material participation thresholds
4. Cannot aggregate husband and wife time to meet the hours. Once has to have correct amount.
5. Must meet 1 of 7 tests.
6. Must prove material participation
a. Daily time reports
b. Identification of services performed
c. Appointment books, calendars
i. Courts want detailed written records
d. Narrative Summaries
vi. Works in real property development, construction acquisition, conversion, operation, rental, management or brokerage
vii. Does real estate agent qualify
1. Yes, because invests more than 500 hours as real estate agent!
c. $25k loss deduction rule can only be taken if your adjusted gross income is low enough. For example a married couple with $150K of “modified” adjusted gross income (MAGI) would not be able to take any of the rental loss!
i. Even though rental income or loss is generally passive a special rule allows some individual to offset up to $25k of non passive income with rental real estate losses if adjusted gross income is under $100K.
ii. To qualify for the $25k deduction the tax payer (S corporation shareholder) must own at least 10% of the value of all interest in the activity at the time during the tax year and must actively participate in the operations of the rental property in both the year the loss is incurred and the year recognition is sought if different.
iii. Must have Modified adjusted gross income MAGI of under $100k income
iv. Phases out ratably $100,000 to $150,000
v. Limited partners don’t qualify
vi. Must own at least 10%
vii. Vacation rentals average of 7 days or less do not qualify because they are already non passive.
d. Can make late election still. See page 18
5. Be careful if you own the same or similar percentage interest in your building and business. Why?
6. Ground Rent Not Passive
a. Less than 30% subject to depreciation than income is not passive
i. Mobile Homes
ii. Parking Lots
iii. Land lease for billboards

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009