Interview with Sanford H. Feibusch, CPA

The interview has been transcribed, edited and shortened for clarity. If there are any errors, they are no doubt mine and not Sandy's. If you see errors or have additional questions, please let us know so we can make corrections and or enhancements. Our goal is to provide the most accurate information available.

It's not how much money you make, it's how much money you keep and that means taxes. We were fortunate to have the chance to ask Sanford (Sandy) Feibusch, CPA. the questions you sent. Sandy handles taxes for us (Cleo, Eric and Taylor) and several of our investor clients.

Eric
Good morning. Thanks for taking the time for this interview. Please tell us a little about yourself.
Sandy
I've been a CPA for 39 years and an accountant for 44 years. I used to work for the largest accounting firm in the world, Coopers & Lybrand, now known as Price Water House Coopers, down to the smallest just me. I went to college at Adelphi University. Graduated with a BBA in Accounting in 1975.
Eric
The questions today revolve around a few areas that our clients are most interested in: LLCs, depreciation and the impact of the new tax laws. Let's start with the LLC. Suppose I have my properties in an LLC. Can I have the rental income deposited into my personal account or do I need a dedicated account for the LLC?
Sandy
It depends on the LLC ownership. If there is only one member (or a husband and wife), there is no requirement that you set up a separate bank account since it will go on your personal return. It's better to have a separate account but as I said, there is no requirement. Where there is a single owner (or a husband and wife own it) it is called a disregarded entity. With a disregarded entity you get all the benefits of the LLC but you don't have the cost of having to file a separate partnership tax return.

If there is more than a single individual (or husband and wife) owner, then you should deposit the funds into a separate bank account since you will have to file a partnership tax return.
Eric
Do you always have to set up an EIN for any LLC?
Sandy
Correct.
Eric
What do you have to do to take advantage of the 20% pass-through deductions for LLCs?
Sandy
The 20% pass-through deduction is meant for businesses. To take advantage of it you have to be a real estate professional or spend at least 100 hours per year per property. Note that if you're only running one or two properties it's hard to justify it as a business, it's actually an investment. But if you are spending over 100 hours per year on each property and there's a profit, then you can take 20% of that profit as a tax deduction. That is called a QBI. (Qualified business income.)
Eric
So if a person owns one or two properties and has a property manager managing the properties, it would be hard to argue that the person spends over 100 hours per year per property managing their properties.
Sandy
Correct.
Eric
How do you take money out of your LLC without creating a problem with the IRS?
Sandy
Just write yourself a check.
Eric
Is there any special procedure if I need to contribute money to my LLC (to cover expenses)?
Sandy
If it's a single member LLC you are fine depositing your personal money into the LLC. When the LLC makes money you can take the money back.

If there are multiple members in the LLC I would make a check out to the property account and I would have proof that it's my personal money going in as a loan to that property. When there are multiple members in an LLC but only one member puts money in, you really want to show it as a loan because that person wants their money back and not have it distributed to all partners.
Eric
What are your thoughts about LLC versus series LLC?
Sandy
If you have more than one property, you want to go with a Series LLC so that if you have a problem with one property and someone sues you, the other properties are protected.
Eric
I believe the cost of a standard Nevada LLC is $350/Yr. What is the cost of a series LLC?
Sandy
It is still $350. That's the beauty of it. To do it correctly I always send people to a real estate attorney to form it. If you choose to do it yourself, on the Nevada business site there is a box to check on the questionnaire when you're forming the LLC that says it's going to be a series LLC. With a Series LLC you only have to file one tax return with the IRS. It encompasses all the sub-LLCs.
Eric
We have heard of trust attorneys who do not want to set up a series LLC.
Sandy
That's because they don't understand it. You need a real estate attorney, not a trust attorney.
Eric
If you are a resident of another state and own rental properties in Nevada can you set your LLC up in Nevada?
Sandy
I have clients who do that, you just need an address here. You have to have an address in Nevada and treat it as a Nevada LLC. When that person files his California return the income or loss on the property here goes on their California return.
Eric
Can you use a P.O. Box as an address for an LLC?
Sandy
Yes. I also have a few clients who are using my address for their LLC.
Eric
Let's change the topic to depreciation. If you do not claim depreciation on your property as you go along, when you sell the property is the IRS is going to treat it as if you did claim the depreciation?
Sandy
That's correct. Their terminology is you must calculate depreciation recapture on "allowed" or "allowable". So, if there was depreciation that you choose not to take all along, when you sell the property, the IRS will assume that there was depreciation and deduct what you could have deducted.
Eric
Where does depreciation recapture affect you?
Sandy
Depreciation recapture is assessed when the sale price of an asset exceeds the tax basis or adjusted cost basis. The difference between the sale price and the basis is "recaptured" by treating it as ordinary income. For example, suppose you have a property that you paid $100,000 dollars for and you claim 20% was land and 80% was improvements. So we divide the improvement cost ($80,000) by 27.5 [the IRS useful life] and we have $2,909/Yr. If you sold that property after 5 years, even if you never claimed that depreciation, the IRS would calculate $2,909 x 5 and your gain would be $14,545 larger than you thought because of depreciation recapture. You want to claim the depreciation each year as you go along.
Eric
People seem to use 80% for property and 20% for land. Is there a specific rule for that?
Sandy
No. To do it correctly you should get an appraisal and from that you will know what is land versus what is improvements. We all use 20% or 22% just as a convention. I have never had a problem with the IRS at that amount. In fact, I don't think I have ever had a real estate audit in 44 years.

However, if you have a unit in a multi story condo then I would say the value of the land is less than 20% because there are multiple stories. But, if the condo was in New York City, the land could be 50% of your cost, whereas here it may be 20%.
Eric
Under the new tax laws, what is the best way to maximize your deductions?
Sandy
If it's an individual you get a $12,000 standard deduction. If it's a head of household, then it's an $18,000 standard deduction. For a married couple it's $24,000. After the standard deductions we are left with three other deduction categories: charity, taxes and mortgage interest. If those three combined don't exceed the standard deduction, we take the standard deduction. If they do, we use itemized deductions.
Eric
Schedule E is in addition to any standard deductions?
Sandy
Correct. Schedule E is for your rental income or loss. It is separate from Schedule A.
Eric
So, you take your standard deductions (standard or itemized) plus what ever you have on Schedule E?
Sandy
Correct.
Eric
Can you talk about passive income versus active income versus rental income etc?
Sandy
Real estate by nature is passive income. So, unless you're a professional, you can't claim your loss.
Eric
But you can offset the basis when you sell?
Sandy
Absolutely. Whatever you have to bottle up. You may deduct your bottled passive losses from the profit you earn when you sell your rental property. For example, if you're limited this year on your loss to only 20% of a $50,000 loss, the remaining $40,000 dollar loss is bottled up until you sell the property. Bottled losses offsets ordinary income, not capital gains. So a high earner who's anywhere in the 35 percent or 36 percent tax bracket is getting the bottled up loss at 36 percent; whereas capital gains rate would only be 15 percent.
Eric
If you have a passive loss can you offset passive gains despite your income?
Sandy
Yes, but stocks and bonds don't count and can't offset with losses in real estate. They are two different issues. It has to be a real estate gain to offset a real estate loss.

The IRS calls capital gains, interest, and dividends investment income. Investment income is not passive income. Even though it's "passive" it's "investment income." For example, if you buy stock on margin and you have a $100,000 dollar expense, that is carried forward forever until you use it. But it can only be used against investment income. You can't use it to offset a passive gain on a real estate property.
Eric
If I'm not a real estate professional and I manage my own properties, do I have more tax flexibility?
Sandy
If you manage them yourself, it's active participation, not just an investment. You can take a loss deduction up to $50,000/Yr. If the property is purely passive and you run a loss, you are not entitled to take a loss.
Eric
So if you are managing it yourself the 100-hour rule kind of goes away because you are actively involved.
Sandy
Yes. If you don't manage the property yourself, you are not entitled to take any loss. If you actively manage the property then you can claim a loss up to $150,000 in income. If you're a real estate professional you can claim losses no matter what your income is.
Eric
So, no matter what your income is if you're not actively involved you have to bottle it?
Sandy
Correct.
Eric
Can you talk about how SALT (state and local taxes) cap impacts investors who reside in a high tax state if they invest in a Nevada property?
Sandy
SALT cap doesn't affect your rental deductions, investors can still claim property taxes and other expenses on Schedule E. The SALT deduction comes in on Schedule A where interest for a residential loan and state taxes would go. For example, suppose a person lives in New York State and makes a lot of money. And, they paid $100,000 in state income tax and $40,000 in property taxes. He would be limited to $10,000 deduction even though he had over $140,000 dollars worth of deductions.
Eric
How do I handle the expense of renovating a property to get it market ready?
Sandy
It gets capitalized.
Eric
So, it is, in effect, amortized over 27.5 years (or 39 if commercial).
Sandy
Yes, because it's all part of getting the property ready for rent. For example, if there are five broken windows that must be repaired prior to renting it, that has to be capitalized. But, suppose the building is rented and 5 windows are broken during a storm, that is an expense.
Eric
There were rumors back when the Tax Reform Act was just passed that you could deduct up to 1 million in the first year.
Sandy
That's not rehab costs. That's where you're putting new equipment into production.
Eric
Thank you for your time. Is there any final advice you have for investors?
Sandy
Just be reasonable and be consistent with how you treat things. You do not want to answer a question like, "Why did you treat something one way and then another way".