Jeffrey Ballenthin is a founding partner of Ballenthin, Funk & Johnson, LLP. He has extensive experience in various fields of accounting and taxation in real-estate transactions. InvestProp asked Jeffrey 5 multifamily relevant questions. More information can be found on his website or you can contact Jeffrey directly at (651) 689-0130.
- Tell us about the services Ballenthin, Funk, & Johnson, LLP offers to multifamily apartment owners.
We are a full service CPA firm that specializes in construction and real estate. The most common services we provide to multifamily owners are tax preparation, partnership structuring, transaction structuring, and financial operations consulting. For people who own HUD properties, we do Audited financial statements, REAC data submissions, and cost certifications. For developers we do everything from budgeting, to capital stack structuring, to construction loan draw requests. - First time investors and seasoned verterans form new partnerships to purchase multifamily rent property. If you were advising an individual partner at the time of formation, what tax planning advice would you offer him/her?
The most important thing we do for multifamily clients when forming a partnership is talk with them about their intentions and risk management. We share stories about partnership disputes we have seen and offer suggestions to prevent future problems. Once everyone is comfortable with the general intent, we read the agreement to make sure it both accomplishes the intent, and complies with tax rules. - Multifamily properties often operate at a taxable loss after depreciation. Do you have any rules of thumb for small and large owners?
The rules for how rental losses affect an owner’s tax return are more complicated than many CPAs think. As experts in this area, we feel comfortable describing the rules to our clients. We first inform the owner about which tax-classification they qualify for. The three possible classifications are Passive Investor, Active Investor, and Material Participating Real Estate Professional. Each classification has different rules regarding how much, if any of the rental losses can be used to off-set other types of income. We then analyze the effects of each classification on the owner’s overall tax situation to pick the option that maximizes the overall wealth of the owner. - Most multifamily properties have caretakers who live with reduced or free rent/income. Any special tax considerations for owners with caretakers?
Since it is common for multi-family owners to give rent discounts to caretakers, it is important to understand these rules. To avoid tax problems as a result of the arrangement, both parties should document 1) The lodging is provided for the convenience of the employer, 2) the lodging is on the business premises of the employer, and 3) the lodging must be accepted by the employee as a condition of their employment. Each of these requirements has been defined in the tax code, court cases and other sources of tax information. We generally suggest a written agreement with the caretaker that includes some key language to meet these criteria. - Do you have any new tax code updates or trends for multifamily rental property owners?
The IRS recently issued new regulations describing which expenses should be capitalized and depreciated versus expensed in the current period. Some of the new rules affect multifamily owners. There were new 1099 reporting rules included in the Small Business Jobs Act signed by the President in 2010. In general, we always advised our clients to prepare them. However, congress felt the need to specifically include 1099 reporting for rental real estate owners in the law. This implies that 1099 reporting was not required for all rental property owners under the prior law. Even though the law was repealed by the Taxpayer Protection and Repayment of Exchange Subsidy Overpayments act of 2011, we are left with additional clarity on 1099 reporting. An interesting trend we have seen is the Minnesota Department of Revenue initiating audits related to owners “at-risk” basis in properties. This is interesting because in the past, only the IRS would audit on this issue. The MNDOR has also stepped up sales tax audits. This affects multifamily owners mostly in lawn care and cleaning which are both subject to sales tax. Finally, we have seen a sharp increase in IRS audits of meals and entertainment expenses across the board.
Lunch & Learn
Please join InvestProp for its monthly “Lunch & Learn” event on February 22. Mr. Ballenthin will speak from 12:00 – 12:30 pm on his firms multifamily services that include investment property tax, accounting, bookkeeping and structuring partnerships. This will be followed by an open Q&A and network opportunity for all attendees.
