Author: Leon Clinton

Are you interested in becoming a commercial or residential landlord?

If so, you’ll likely have to shell out plenty of money before ever collecting a dime in rent. The tax code treats some of those monies as start-up expenses.

Start-up expenses are some of the costs you incur before you offer a property for rent. There are two broad categories:

1. Investigatory
2. Pre-opening costs, such as advertising, office expenses, salaries, insurance, and maintenance costs

Your cost of purchasing a rental property is not a start-up expense. Rental property and other long-term assets, such as furniture, must be depreciated once the rental business begins.

On the day you start your rental business, you can elect to deduct your start-up expenses.

The deduction is equal to

• the lesser of your start-up expenditures or $5,000, reduced (but not below zero) by the amount by which such start-up expenditures exceed $50,000, plus
• amortization of the remaining start-up expenses over the 180-month period beginning with the month in which the rental property business begins.

When you file your tax return, you automatically elect to deduct your start-up expenses when you label and deduct them on your Schedule E (or other appropriate return).

Costs you pay to form a partnership, limited liability company, or corporation are not part of your start-up expenses. But under a different tax rule, you can deduct up to $5,000 of these costs the first year you’re in business and amortize any remaining costs over the first 180 months you are in business.

Note that the cost of expanding an existing business is a business operating expense, not a start-up expense. As long as business expansion costs are ordinary, necessary, and within the compass of your existing rental business, they are deductible.

The IRS and tax court take the position that your rental business exists only in your property’s geographic area. So, a landlord who buys (or seeks to buy) property in a different area is starting a new rental business, which means the expenses for expanding in the new location are start-up expenses.

You can’t deduct start-up expenses if you’re a mere investor in a rental business. You must be an active rental business owner to deduct them.

If you would like to discuss start-up expenses, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• January 2, 2024

Here’s a short overview to assist you, as a non-U.S. citizen, in understanding the essential tax and related issues you should consider while pursuing your business ventures in the United States.

U.S. citizenship. You can start a business in the U.S. without being a U.S. citizen. If you will be managing your business from within the U.S., you may need a valid work visa or green card.

Work visas. The E-2 visa is popular among entrepreneurs. It requires citizenship from a treaty country, significant capital investment, and a controlling interest in your business. Alternatives include F-1 OPT, H-1B, O-1, and L-1 visas, depending on your situation.

Green card option. The EB-5 visa provides a path to a green card for those ready to invest $800,000 to $1.05 million and create 10 full-time jobs in the U.S.

Business planning. Before starting, conduct thorough market research and choose the right business structure and location. Register your business at the federal and state levels, and obtain an Employer Identification Number (EIN).

U.S. taxation. Familiarize yourself with the U.S. tax system, including federal, state, and local taxes. Tax implications vary based on your entity type.

Sales taxes. Learn the rules for sales tax on goods and services, which vary by state and locality.

Employment taxes. Comply with federal and state employment tax requirements for employees and independent contractors.

International tax considerations. Be aware of international tax issues, including tax treaties and foreign tax credits.

Record keeping and compliance. To avoid penalties or business revocation, maintain accurate financial records and ensure compliance with U.S. tax laws.

Professional advice. We highly recommend seeking advice from a tax professional with expertise in international taxation and an attorney specializing in immigration and business visas.

We are here to assist you every step of the way. Please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 27, 2023

Here is some important information regarding the net investment income tax (NIIT), which may be relevant to your financial situation.

NIIT Overview

The NIIT is a 3.8 percent tax that could apply if your modified adjusted gross income (MAGI) exceeds $200,000 (single filers), $250,000 (married, filing jointly), or $125,000 (married, filing separately). It targets the lesser of your net investment income or the amount by which your MAGI exceeds the thresholds.

What Qualifies as Net Investment Income?

Net investment income includes income from investments (such as interest, dividends, and annuities), net rental income, and income from businesses in which you don’t materially participate. It does not include wages, self-employment income, tax-exempt income, and distributions from qualified retirement plans.

Reducing or Avoiding the NIIT

To mitigate the NIIT, it’s crucial to understand what’s triggering it—your net investment income or your MAGI. Here are some strategies:

1. Invest in municipal bonds. Pick bonds that are exempt from the NIIT and from federal and state taxes.
2. Donate appreciated assets. The correct asset donation avoids the NIIT and provides a tax deduction.
3. Avoid selling appreciated stock. Buy growth stocks that don’t pay dividends, and hold them.
4. Utilize Section 1031. It avoids MAGI and net investment income, and defers taxes.
5. Invest in life insurance and annuities. This typically defers tax until withdrawal.
6. Harvest investment losses. This can offset gains and reduce taxable income.
7. Invest in rental real estate. Structured correctly, this can minimize taxable income.

Other Strategies

• Active participation in business. It avoids classifying income as net investment income.
• Short-term rentals and real estate professional status. These also avoid classifying income as net investment income.
• Alternative marital status. Though this option may seem extreme, two single taxpayers have a higher MAGI threshold than a married couple.
• Retirement plan investments. These can reduce MAGI.
• IRA conversions. Converting traditional IRAs to Roth IRAs may trigger the NIIT but can have long-term tax benefits.
• Installment sales. They can level out MAGI over time.

The NIIT can be complex, but strategic planning can significantly reduce its impact. If you want to discuss the NIIT, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 19, 2023