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I am a physician and has some rental properties. I started…

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Good afternoon, I am...

Good afternoon, I am a physician and has some rental properties. I started with one and now I have 4 of them. Since my income is above $150k I cannot deduct any loses and they are considered passive income. With now four of them, I am kind of actively involved with my property manager and wondering can I convert them into a business?

Submitted: 7 months ago.Category: Tax
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11/13/2017
Tax Professional: Tax.appeal.168, Tax Accountant replied 7 months ago
Tax.appeal.168
Tax.appeal.168, Tax Accountant
Category: Tax
Satisfied Customers: 4,712
Experience: 3+ decades of varied tax industry exp. Tax Biz owner
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Hello. Thank you for choosing this Q&A service for assistance. My name is***** am prepping my response. I will get back to you shortly.

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Tax Professional: Tax.appeal.168, Tax Accountant replied 7 months ago

Are you referring to something like forming a an LLC for your real estate investments? If so, yes, you can do this. However, before doing so, you want to familiarize yourself with the pros and cons of doing so. SEE BELOW:

-------------------------------

The insulation from personal risk exposure for real estate investors provided by LLCs, coupled with the relative ease of administration and potential tax benefits, make ownership of investment property through an LLC a very desirable option in most instances. Please refer to the reference source for more detailed information relating to the pros and cons of forming an LLC for your R.E. investments.

REFERENCE SOURCE:

https://www.legalzoom.com/articles/forming-an-llc-for-real-estate-investments-pros-cons

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Customer reply replied 7 months ago
That's what I heard but can I realize my losses in the last 12 years which are accumulated in my personal tax returns?
Tax Professional: Tax.appeal.168, Tax Accountant replied 7 months ago

My initial thought is no, however, I need to research this matter further before I can provide you with a definitive answer. I will get back to you shortly.

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Tax Professional: Tax.appeal.168, Tax Accountant replied 7 months ago

Based on the following information, it appears that the answer is no because the LLC would be considered a related party because you will be the owner of it. SEE BELOW:

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(f)Treatment of former passive activities For purposes of this section—

(1)In general If an activity is a former passive activity for any taxable year—(A)

any unused deduction allocable to such activity under subsection (b) shall be offset against the income from such activity for the taxable year,

(B) any unused credit allocable to such activity under subsection (b) shall be offset against the regular tax liability (computed after the application of paragraph (1)) allocable to such activity for the taxable year, and

(C) any such deduction or credit remaining after the application of subparagraphs (A) and (B) shall continue to be treated as arising from a passive activity.

-------------------------------------

(g)Dispositions of entire interest in passive activityIf during the taxable year a taxpayer disposes of his entire interest in any passive activity (or former passive activity), the following rules shall apply:

(1)Fully taxable transaction(A)In generalIf all gain or loss realized on such disposition is recognized, the excess of—(i)

any loss from such activity for such taxable year (determined after the application of subsection (b)), over

(ii)

any net income or gain for such taxable year from all other passive activities (determined after the application of subsection (b)),

shall be treated as a loss which is not from a passive activity.

(B)Subparagraph (A) not to apply to disposition involving related party

If the taxpayer and the person acquiring the interest bear a relationship to each other described in section 267(b) or section 707(b)(1), then subparagraph (A) shall not apply to any loss of the taxpayer until the taxable year in which such interest is acquired (in a transaction described in subparagraph (A)) by another person who does not bear such a relationship to the tax­payer.

(g)Dispositions of entire interest in passive activityIf during the taxable year a taxpayer disposes of his entire interest in any passive activity (or former passive activity), the following rules shall apply:

(1)Fully taxable transaction(A)In generalIf all gain or loss realized on such disposition is recognized, the excess of—(i)

any loss from such activity for such taxable year (determined after the application of subsection (b)), over

(ii)

any net income or gain for such taxable year from all other passive activities (determined after the application of subsection (b)),

shall be treated as a loss which is not from a passive activity.

(B)Subparagraph (A) not to apply to disposition involving related party

If the taxpayer and the person acquiring the interest bear a relationship to each other described in section 267(b) or section 707(b)(1), then subparagraph (A) shall not apply to any loss of the taxpayer until the taxable year in which such interest is acquired (in a transaction described in subparagraph (A)) by another person who does not bear such a relationship to the tax­payer.

REFERENCE SOURCE:

https://www.law.cornell.edu/uscode/text/26/469

---------------------------------------------

Relationship defined:

(b)RelationshipsThe persons referred to in subsection (a) are:

(1) Members of a family, as defined in subsection (c)(4);

(2) An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;

(3) Two corporations which are members of the same controlled group (as defined in subsection (f));

(4) A grantor and a fiduciary of any trust;

(5) A fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts;

(6) A fiduciary of a trust and a beneficiary of such trust;

(7) A fiduciary of a trust and a beneficiary of another trust, if the same person is a grantor of both trusts;

(8) A fiduciary of a trust and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for the trust or by or for a person who is a grantor of the trust;

(9) A person and an organization to which section 501 (relating to certain educational and charitable organizations which are exempt from tax) applies and which is controlled directly or indirectly by such person or (if such person is an individual) by members of the family of such individual;

(10)A corporation and a partnership if the same persons own—(A)

more than 50 percent in value of the outstanding stock of the corporation, and

(B) more than 50 percent of the capital interest, or the profits interest, in the partnership;

(11) An S corporation and another S corporation if the same persons own more than 50 percent in value of the outstanding stock of each corporation;

(12) An S corporation and a C corporation, if the same persons own more than 50 percent in value of the outstanding stock of each corporation; or

(13) Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate.

REFERENCE SOURCE:

https://www.law.cornell.edu/uscode/text/26/267

--------------------------------------------

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