How to Document Hours As A Real Estate Professional

Today’s Tax Tuesday episode covers a variety of questions about short-term and long-term rentals, the IRS rules around those entities, and lots of tips and stories about how to report and document your time so as not to trigger an IRS audit. Toby Mathis hosts, with special guest Eliot Thomas from Anderson Advisors, and some of the staff from Anderson including Dana, Patty, Ander, Matthew, Dutch, Cindy, Trisha, Cristos, Piao - are all online today to help answer your questions.  If you have a tax-related question for us, submit it to taxtuesday@andersonadvisors.

Highlights/Topics:

• "For a 1031, does acquiring the beneficial interest of a land trust holding title to real estate qualify as replacement property? Same question, but an installment sale for the beneficial interest of a land trust." First question: When you look at the 26 USC 1031 and I want to say a to e, I believe, are the list of all of the exceptions, you'll see that the acquisition of a beneficial interest in a trust is one of the exceptions to being able to qualify for a 1031 exchange. Second question: What you can't do is go ‘no debt’ to ‘debt’.
• "How can the IRS prove we as owners used our short-term rental for more than 14 days or 10% of rental rented days?" How can they prove it, dang it?" The reality is they probably can't unless they somehow got the ability to go out there, research, find out, bring it into court, and documents were produced, et cetera. The reality is they probably can't. But I would suggest that you'd be very honest.
• "My wife is the property manager of our small real estate portfolio. What is the best way to document the hours she spends on our business as we are claiming she is a full-time real estate professional to unlock the potential extra tax benefits."We hire professionals for plumbing, AC repair, and she handles items like semi-annual home inspections, painting AC filter, deliveries, all advertising, bookkeeping, et cetera. Thank you." Put the date, what the activity was, the amount of time you spent. I'm assuming this is a local property, kind of in your town area, put down the time you drove there, the time it took to drive back, the time on the phone calling, et cetera. Any of that, just document it in an Excel spreadsheet. Use MileIQ if you're tracking mileage, for example. It'll GPS you. It'll also tell you the times and everything along those lines if you want to track everything.
• "I have a Fidelity brokerage taxable mutual fund account. It is not a retirement account. The taxable account has two mutual funds inside. One is a diversified growth and the other is a more balanced 60-40," probably bonds. "I started investing in these accounts in 1992 and directed all dividends and capital gains to be reinvested in the same funds." So a drip. "On a positive note, the account has grown dramatically, but the bad news is that both funds have high costs associated with them, i.e., actively traded, high turnover, which drives up costs. I would like to somehow move the money to a more tax-efficient index stocks such as XLY, the Dividend Kings, Dow Diamonds, QQQ, S&P 500, VOO, et cetera. Will I be able to do so with no tax or minimal tax implications?" I think you'd have to sell and that is a taxable event. Now you're going to have to move it over. We might be able to do things to mitigate that around it—some lost positions or something like that—to offset that gain. But I don't know personally how you would be able to get that transferred over. So is there a way to avoid the tax on the capital gain? It's really hard. You could sell other assets that have capital losses and harvest some losses like maybe you have crypto.
• "After using accelerated depreciation on a new Airbnb this year, can I avoid future recapture in the case of a sale through a 1031 exchange? Can I exclude some nights when I stayed overnight on the Airbnb property for the purpose of improvement, say installation of the gutter guards by a company the next day? I had to be there to receive the furniture delivered, which I also had to unpack, move, and put in the right places." Yes-If it's used in trade or business, yes.
• "Can I take a primary home loan on a property that has been bought with 1031 exchange funds and live in the property myself?" Yes. But of course, there are rules behind it. I don't know that there's a fast and steady rule for how long you have. You have to use it after the 1031 in a trade or business.
• "How does the new corporate transparency law affect our LLC structures? Are you confident that Anderson can figure out a workaround to maintain anonymity? What are the good and bad takeaways from this new law?" Well, every LLC for our clients typically is going to be underneath this because it hits all small businesses.
• "Our family has Christian healthcare medical bill sharing. I'm always told this is not insurance. How does the IRS view this? Can it be deducted for Schedule A? Can it be used as an insurance deduction?" It is not insurance in the eyes of the IRS. It is just a group of people coming together and helping pay one another's medical claims and so that's why it is not insurance. Insurance is defined as something that can be deducted. This cannot be deducted. It cannot be used on Schedule A. It cannot be used as medical reimbursement. there is a proposal out there for regulation where the IRS is trying to change that. They're trying to get to this where this would be deductible.
• "My husband and I acquired a short-term rental this year and are hoping to close on a multi-family property for long-term rental by the end of the year. I am on track with REP status," that is real estate professional status for 2022. "We have come across several potential listings. However, requiring a gut down in major rehab. The likelihood of having this rental done and rented is slim by the end of the year. My question is if having the listing up and ready for rental is considered in service?" If it's someone just putting the listing up there, no. It has to be available for service. It is the status you're trying to get. That means that if you did put it up there, then I could move in there right now. You run the whole risk of needing asset protection if you do something like that.I'll have it available by the last week of the year. Does that allow me to take the deduction this year? The answer is yes.so you can talk to somebody like Eliot because you are dealing with two or three issues that are very fact specific that we don't want you to screw yourself up.
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