Disclaimer: Educational only, not legal advice. Trust drafting requires an attorney. For personalized tax guidance, schedule a discovery chat with Corridor Consulting.

If you’re a parent or grandparent trying to decide between a 529 plan vs UTMA vs trust, you’re not alone. Each option helps you save for a child or grandchild’s future, but they work very differently when it comes to taxes, financial aid, control, and what happens when the child turns 18 or 21. In this guide, we’ll compare 529 plans, UTMAs, and trusts and walk through how 529 plans, UTMAs, and trusts compare—so you can choose the structure that actually fits your family’s goals.

How 529 Plans, UTMAs, and Trusts Differ for Your Child or Grandchild

A UTMA (Uniform Transfers to Minors Act) account is a custodial account where an adult custodian manages money or property that legally belongs to the child until the statutory hand‑over age (Iowa: 21).

Account titles typically look like:

“Parent as custodian for Child under the Iowa UTMA.”

The account uses the child’s SSN and must be used for the child’s benefit. All year-end tax reporting, will be issued in the child’s SSN#, and all funds transfered to the child’s account are treated as completed gifts, and the childs property.

When a UTMA Shines

UTMAs tend to work very well when you’re planning for:

• Medium to long‑term goals the child will personally use, such as a car at 16, college extras at 18, first‑home fund at 21.
• Grandparent gifting—completed gifts to the child, annual exclusion‑friendly.

UTMA’s are also low cost and simple to establish— you can open one at a bank or brokerage with minimal paperwork. Provide the child or grandchild’s SSN#, along with yours as the custodian, and if you would like you can establish a successor custodian (such as a spouse or family member) in the event you are unable to serve (death, disability, incapacitation)

When a UTMA Is a Poor Fit

• You don’t want an age‑21 hand‑over.
• You need spendthrift protections or ongoing oversight beyond 21.
• You need purpose limits (e.g., “home purchase only”) enforceable past 21.

UTMA: Pros and Cons

Pros

• Simple and inexpensive to establish and maintain.
• Gifts are completed to the child; clean for annual exclusion planning.
• Income is reported under the child’s SSN (subject to kiddie tax thresholds).
• Generally shielded from the custodian’s personal creditors; held for the child.
• Clean fit for car, education extras, first apartment, first‑home funds.

Cons

• Mandatory hand‑over at 21 in Iowa—no strings attached after that.
• Counts as a student asset for FAFSA (heavier aid impact than parent assets).
  • This can be bypassed if the UTMA funds are contirbuted to a UTMA 529 plan prior to filing for FAFSA, in that case, those funds currently would be treated as the parent’s assets even in the case they are in a 529 UTMA, which carries a much more favorable aid impact.
• Becomes part of the child’s estate if the child dies.
• Custodian must maintain records showing each spend was for the child’s benefit.
• No built‑in spendthrift features to protect from the child’s creditors/divorce once they own it.

Iowa‑Specific Notes (High Level)

• Statutory hand‑over (age of termination): 21.
• One custodian per account (the other parent can be named successor custodian).
• Proper titling and separation from parent funds are essential.

What Is a Trust for a Minor?

A trust is a legal arrangement drafted by an attorney where a trustee manages property for a beneficiary according to written terms you choose.

Trusts can be designed as grantor or non‑grantor for tax purposes and can include spendthrift protections and custom distribution rules.

Common Minor‑Focused Trust Types

• §2503(c) Minor’s Trust — designed so annual gifts generally qualify for the gift‑tax annual exclusion without Crummey notices; beneficiary typically gains access at a stated age (often 21) unless the trust continues under terms.
• Crummey‑power Trust — beneficiaries receive temporary withdrawal rights to qualify gifts for the annual exclusion; trustee can still manage long‑term under the trust’s terms.
• Grantor Trust for a Minor — income taxed to the grantor (often simpler for taxes), while the trustee controls distributions under your rules.

When a Trust Shines

A trust is usually the better tool when:

• You want to avoid an age‑21 cliff—e.g., release funds at 25/30 or in milestones.
• You need spendthrift/creditor protection for the child.
• You want purpose‑limited distributions (e.g., first‑home purchase, education, health/maintenance, or matching the child’s earnings).
• You have blended‑family or complex estate goals (successor control, what happens on death, multiple beneficiaries).

Trusts: Pros and Cons

Pros

• Custom control over timing and purpose (no forced hand‑over at 21).
• Potential spendthrift protections from the child’s creditors and divorces.
• Tailored estate planning—successor trustees, alternate beneficiaries, tax‑efficient cascades.
• Can be tax‑optimized (e.g., grantor trust) when appropriate.

Cons

• Up‑front legal drafting and ongoing administration.
• Tax reporting complexity:
  • Grantor trusts usually report income on the grantor’s Form 1040 under Reg. §1.671‑4. Many states and practitioners still prepare an “information‑only” Form 1041 (or grantor statements) to document items; some plans or states require a filing even when income is fully reported by the grantor. The grantor statement is filed under the trust, and the items are taxable on the grantor’s Form 1040.
  • Non‑grantor trusts must file Form 1041 annually. They face compressed brackets and possible NIIT; distributions carry out DNI to beneficiaries via Schedule K‑1.
• Requires a suitable trustee and fiduciary accounting.
• Gifts may need Crummey notices (unless using §2503(c) structure) to leverage the annual exclusion.

Trust Tax Filing at a Glance

• Grantor trust (child as beneficiary; parent grantor): Income generally taxed to the grantor’s 1040; the trustee may issue a simple grantor statement or file a Form 1041 (grantor type) for information only.
• Non‑grantor trust: Trust is its own taxpayer; files Form 1041; may issue K‑1s if it distributes income; consider 65‑day election for timing.
• State filings: States may require returns even when federal rules allow owner‑reporting—confirm Iowa and any state of trustee/asset situs.

529 Plan vs UTMA vs Trust: Side-by-Side Comparison: Side‑by‑Side Comparison

When families compare a 529 plan vs UTMA vs trust, they’re usually weighing simplicity, tax treatment, financial aid impact, and how much control they keep as the child becomes an adult.

529 Plan vs UTMA vs Trust: Side-by-Side Comparison

Practical Playbooks: Using a 529 Plan, UTMA, and Trust in Real Life

“Middle‑Class, First‑Home at 21” (Low‑Complexity)

• UTMA brokerage + savings for car/college extras/home down payment.
• Parent‑owned 529 for tuition/qualified education (financial‑aid and tax‑efficient).
• De‑risk 12–24 months before each spend (move from equities → cash/short Treasuries/I Bonds).
• Use a custodial 529 for some UTMA dollars if education structure helps behaviorally.

“Control Beyond 21 + Protections” (Moderate Complexity)

• Direct new gifts to a purpose‑built trust (e.g., 2503(c) or Crummey trust with spendthrift terms).
• Keep education dollars in a parent 529; limit UTMA to short‑term, pre‑21 goals.
• Consider a trustee who knows the child and will follow the distribution standards.

UTMA for Homeschooling & K‑12: Why It’s Powerful

UTMA accounts work very well for homeschooling families. Because UTMA funds must be used for the child’s benefit, you can generally pay for homeschooling curricula, textbooks, online courses, tutoring, testing fees, computers and software, educational therapies, and activity fees directly from the UTMA, as long as you can document that the spending was for the child.

Under prior law, 529 plans were mostly limited to K-12 tuition only, but the “Big Beautiful Bill” (formally the One Big Beautiful Bill Act) changed that. For distributions after July 4, 2025, federal law now allows 529 funds to be used tax-free for a broader set of K-12 and homeschool-related expenses, including things like curriculum materials, books and other instructional materials, online educational platforms, qualifying tutoring or educational classes outside the home, standardized test fees, dual-enrollment fees, and educational therapies for students with disabilities, all subject to annual K-12 limits and your state’s conformity rules.

That said, UTMA dollars are not tied to a “qualified expense” list the way 529s are. As long as the spending is genuinely for the child’s benefit, a UTMA can often cover a wider range of homeschool-adjacent costs—co-op fees, enrichment activities, certain supplies or experiences that may not cleanly fit the 529 definition of qualified expenses.

Planning tip: If you’ll later pursue need-based aid, consider using UTMA funds for broader K-12/homeschool costs (especially items that don’t clearly meet 529 “qualified expense” rules), and keep long-term college dollars in a parent-owned 529, which is generally treated more favorably than student assets like a UTMA on the FAFSA.

UTMA → 529 Funded with UTMA Dollars: How & Why

This UTMA-to-529 move is a common tweak for families who originally chose a UTMA but later realize that, in the 529 plan vs UTMA vs trust decision, financial-aid rules and tax-free 529 growth can tilt the balance toward using a 529 for education dollars.

The UTMA funds are the child’s. You can sell investments inside the UTMA and then contribute that cash to a 529 plan for that same child, so the money grows tax-advantaged for education. The 529’s account owner is typically a parent, but because the dollars came from the UTMA, they remain irrevocably for that beneficiary under the plan’s UGMA/UTMA rules (you’re just changing the “wrapper,” not who owns the money).

Why this helps

• Financial-aid friendliness: For a dependent student, a 529 established for that student is generally treated as a parent asset on the FAFSA, which is a lighter hit than leaving the same dollars in a student-owned UTMA. You’re effectively “moving” the asset from the student bucket to the parent bucket for aid purposes.
• Education alignment: Inside the 529, earnings grow tax-deferred and qualified withdrawals are tax-free. With the “Big Beautiful Bill” changes, that now covers college costs plus an expanded list of K-12 and homeschool-related expenses (curriculum, instructional materials, certain tutoring and therapies), subject to annual K-12 limits and state conformity. The 529 structure also creates a behavioral guardrail—non-qualified withdrawals face tax and penalty.
• Distribution control: As the 529 account owner, the parent decides when and which qualified education expenses get paid, even though the funds are irrevocably for that child’s benefit.

Important notes

• The contribution is irrevocably for that child; UTMA-sourced amounts are generally locked to that beneficiary, and plans may restrict changing the beneficiary on those dollars.
• To fund the 529, you’ll typically sell UTMA investments first—that can realize capital gains taxed at the child’s rates. Keep a clean paper trail in your UTMA ledger showing the sale and the subsequent 529 contribution as “for the child’s benefit.”
• For K-12, 529 plans can now cover tuition plus certain defined homeschool/K-12 expenses (curriculum, materials, eligible tutoring, testing, etc.), but they’re still tied to a federal “qualified expense” list and annual limits. UTMAs remain the more flexible bucket for broader homeschool or enrichment costs that may not clearly qualify under 529 rules.
• Ownership and beneficiary-change rules vary by 529 plan. Always check your plan’s current program description and make sure UTMA-sourced amounts are correctly flagged on the account.

FAFSA and Financial Aid: How 529 Plans, UTMAs, and Trusts Are Counted

FAFSA rules are a big part of deciding between a 529 plan vs UTMA vs trust, because each structure is reported differently and can change how much need-based aid your child qualifies for.

Legal citation (Higher Education Act): 20 U.S.C. § 1087vv(f)(3)(B) — a “qualified education benefit” (which includes a §529 qualified tuition program) is treated as a parent asset if the student is a dependent student and the account is designated for the student, regardless of whether the owner of the account is the student or the parent.

Practical impact: A 529 for a dependent student—including one funded from that student’s UTMA dollars—is reported as a parent asset on the FAFSA (lighter assessment) when properly established for that student. By contrast, UGMA/UTMA accounts are student assets and are assessed more heavily under FAFSA formulas. (Note: CSS Profile schools may apply different rules.)

Compliance checklist: Moving UTMA → 529 for the Same Child

1. Liquidate UTMA investments (realize any gains/losses; taxed to the child).
2. Contribute the cash to a 529 designated for that same child (flag the account per plan rules as funded with UGMA/UTMA dollars).
3. Keep a UTMA ledger entry and supporting statements (sale → contribution) showing the transaction was for the child’s benefit.
4. Understand plan restrictions: UTMA‑sourced amounts are generally irrevocably for that beneficiary; beneficiary changes and owner changes are restricted by program rules.
5. Coordinate AOTC/LLC with 529 distributions to optimize education tax benefits.

K‑12 & Homeschool reminder

529 plans can now be used not only for K-12 tuition (subject to federal annual limits and state-specific rules), but also for certain homeschool-related expenses such as curriculum, instructional materials, some online courses, qualifying tutoring, testing fees, and certain educational therapies—depending on how your state and specific 529 plan implement the new rules.

That said, UTMA accounts are still more flexible overall: they aren’t tied to a federal “qualified expense” list. As long as spending is genuinely for the child’s benefit, UTMAs can typically cover a wider range of homeschool and enrichment costs (co-ops, activities, supplies, technology, and experiences) that may not fit neatly within 529 definitions.

Use 529 dollars where you’re clearly within the qualified K-12/college rules, and lean on UTMA funds for the broader homeschool and kid-focused expenses that fall outside that box.

Kiddie Tax: How UTMA Investment Income Is Taxed (2025 rules)

Who it applies to: A child with unearned income who is (a) under 18 at year‑end; or (b) 18 and did not have earned income > half of their support; or (c) a full‑time student 19–23 who did not have earned income > half of support. At least one parent is alive, and the child doesn’t file a joint return. Reporting is on Form 8615.

What counts as unearned income: Interest, dividends, capital‑gain distributions and realized gains, certain rents/royalties, taxable scholarships not on a W‑2, some trust income, unemployment, and alimony. (Wages and self‑employment are earned.)

2025 thresholds (federal):

• First $1,350 of a child’s unearned income is effectively sheltered.
• Next $1,350 is taxed at the child’s rate.
• Over $2,700 is taxed at the parent’s marginal rate via Form 8615.
  (These amounts are indexed annually—update each tax year.)

Planning implications for UTMAs

• Tax‑efficient investing: Favor broad‑market index ETFs and defer gains; avoid high‑turnover funds that spit out distributions.
• Gain harvesting windows: In years with little other unearned income, you may realize some 0% LTCG while staying under kiddie‑tax thresholds—mind the limits.
• I Bonds sleeve: Interest is tax‑deferred until redemption and state‑tax‑free, reducing annual unearned income.
• UTMA → 529 pivot: Moving some UTMA dollars to a 529 (for the same beneficiary) stops ongoing annual taxation inside the UTMA; growth becomes tax‑free for qualified education. Realize that UTMA liquidation may trigger gains in the child’s year of transfer.
• Form 8814 option: If the child’s only income is interest/dividends under the annual cap, parents may be able to elect to report it on their own return (see Form 8814 instructions).

Reminder: Keep a clean UTMA ledger and retain 1099s/1099‑B reports each year. Coordinate 529 distributions with credits like the AOTC to maximize tax benefits.

FAQs: 529 Plan vs UTMA vs Trust for Minors

Do both parents go on a UTMA?
No. A UTMA has one custodian at a time. You can name the other parent (or another adult) as successor custodian so they step in if the primary custodian can’t serve.

Can a custodian’s creditors reach UTMA funds?
Generally no. The money in a UTMA legally belongs to the child, not the custodian, so the custodian’s personal creditors usually can’t reach it. That protection can weaken if there’s misuse, commingling with personal funds, or a claim tied directly to the custodianship.

Will the IRS count a UTMA in an Offer in Compromise (OIC)?
For the parent/custodian’s own tax debt, a UTMA is not their asset. In an OIC or collection context, the IRS focuses on who really benefits from the asset (beneficial interest), and whether there’s a nominee/alter-ego or dissipated asset issue. If the child is the taxpayer, the UTMA may be relevant.

Can we avoid the age-21 hand-over in Iowa?
Not with a UTMA. Under Iowa’s UTMA rules, custodianship ends and the child is entitled to take control at age 21. If you want control or protections beyond 21, you’ll usually:

• Use a trust for future gifts, or
• Help the child set up their own trust after they receive the UTMA assets.

What about FAFSA and financial aid?

• UTMA: Counted as a student asset, which is hit harder in need-based aid formulas.
• Parent-owned 529: For a dependent student, a parent-owned 529 is usually treated as a parent asset, which is assessed more lightly than student assets.
• Trusts: Treatment depends on the trust type and who controls it; many are effectively treated as parent/other assets or resources and may still reduce need-based aid.

You can sell investments in a UTMA and move the cash into a 529 for the same child, often flagged as a UTMA/UGMA-funded 529. For current FAFSA rules, that 529 is generally reported as a parent asset when the parent is the account owner, even though the funds legally belong to the child. That can improve the financial-aid picture versus leaving the same dollars in a straight UTMA. (CSS Profile schools may apply different rules and may look more closely at trusts and custodial accounts.)

Where does a trust fit next to a 529?
Think of it this way:

• A 529 plan is primarily an education-focused, tax-advantaged bucket with clear federal rules and some state tax perks.
• A trust is a custom control and protection tool—for timing, behavior, and creditor/divorce shielding—where education might be one of several approved uses.

Many families end up using both: a 529 for education and a trust (or UTMA) for everything else.

Resources: UTMA, 529 Plans, Trusts & Financial Aid

Iowa & UTMA

• Iowa Uniform Transfers to Minors Act (Chapter 565B)
  Iowa’s statutory framework for UTMA accounts and custodial property.
  https://www.legis.iowa.gov/docs/ico/chapter/565B.pdf

Iowa 529 Plans

• Iowa’s ISave 529 Plan
  Official site for Iowa’s direct-sold 529, including investment options and disclosures.
  https://www.isave529.com/
• Iowa 529 Tax Deduction (Iowa Department of Revenue)
  Guidance on Iowa’s state income tax deduction for qualified 529 contributions.
  https://revenue.iowa.gov/taxes/tax-guidance/tax-credits-deductions-exemption/isave-529-deduction

Federal 529 Rules & Education Tax Benefits

• IRS – 529 Plans: Questions and Answers
  Federal rules on contributions, distributions, and qualified expenses.
  https://www.irs.gov/newsroom/529-plans-questions-and-answers
• IRS Publication 970 – Tax Benefits for Education
  Details on 529 plans, education credits (AOTC/LLC), and coordination rules.
  https://www.irs.gov/pub/irs-pdf/p970.pdf
• Investor.gov – 529 Plans Overview
  SEC/Investor.gov overview of how 529 plans work and key risks/considerations.
  https://www.investor.gov/saving-education-529-plans

Financial Aid: FAFSA, 529s, and Custodial Accounts

• Federal Student Aid – Reporting Investments and Custodial Accounts
  How assets like 529s, UTMAs, and other investments are reported on the FAFSA.
  https://studentaid.gov/help/current-net-worth
• FAFSA – Official Application & Instructions
  The federal financial aid application used by most colleges and universities.
  https://studentaid.gov/
• CSS Profile (College Board)
  Used by many private colleges for institutional aid; may treat assets differently than FAFSA.
  https://cssprofile.collegeboard.org/

Kiddie Tax & Children’s Investment Income

• IRS Topic No. 553 – Tax on a Child’s Investment Income (Kiddie Tax)
  Overview of when the kiddie tax applies and how it’s calculated.
  https://www.irs.gov/taxtopics/tc553
• IRS Instructions for Form 8615
  Instructions for reporting a child’s unearned income subject to the kiddie tax.
  https://www.irs.gov/instructions/i8615

How Corridor Consulting Can Help

• Goal‑first planning: We can help size contributions for car (16), college (18), home (21) and map a de‑risking schedule.
• Account architecture: Help you set up and review UTMA and 529 account titling and beneficiary designations from a tax and planning perspective, and coordinate with your Iowa attorney and custodians to ensure everything matches your legal documents.
• Account & Trust coordination: We partner with your estate attorney to translate goals into workable trust terms and align yearly tax reporting.
• Documentation & compliance: Simple ledgers and procedures to keep UTMA spending “for the child’s benefit,” plus kiddie‑tax and FAFSA awareness.

Ready to compare a UTMA vs a trust for your family?
Book a Discovery Chat with Corridor Consulting to review your goals and design a clear, tax‑smart plan for your child’s future.

Schedule now: We’ll help you evaluate the tax and planning trade-offs between using a UTMA, a 529 plan, and an attorney-drafted trust, and we’ll coordinate with your estate attorney if a trust looks appropriate.

Corridor Consulting provides tax and financial planning services and does not provide legal advice. Always consult your attorney regarding legal questions, including the drafting and interpretation of trust and estate documents

James Yochum's post What’s Better For Your Child Or Grandchild: 529 Plan, UTMA, Or A Trust? was written for Corridor Consulting - Certified Public Accountants - Iowa.

The 2024 NAR Settlement Changed Everything

In 2024, the National Association of REALTORS® (NAR) reached a landmark legal settlement that upended how real estate commissions are structured and disclosed across the United States. One of the most common questions now being asked is “do you need a buyer agreement to see a home in Iowa?” The outcome affects how home buyers, sellers, and real estate professionals engage—and it’s prompting state-by-state law updates to align with new transparency and representation standards.

Iowa became one of the first states to codify these changes through House File 2326, effective April 19, 2024. The law clarifies when a written buyer-broker agreement is required and when a real estate agent can interact with a potential buyer without one.

For CPAs and financial advisors, this shift matters because representation rules now directly influence tax planning, entity structure, and investment timing for clients purchasing or selling real estate.

Understanding Iowa’s Buyer Agreement Rules: Do You Need a Buyer Agreement to See a Home in Iowa?

Under House File 2326, which amended Iowa Code §543B.56A, real estate brokers must have a written buyer-broker agreement in place before showing a property to a buyer they represent. However, that has led to confusion about whether you need a buyer agreement to see a home in Iowa at all—and in most cases, you don’t.¹

This ensures:

• Buyers know who represents them.
• Compensation terms are negotiable and transparent.
• Dual-agency conflicts are minimized.

However, the rule does not prevent buyers from viewing homes—or sellers from getting exposure. Instead, it clarifies the boundary between “working with” a buyer and performing “ministerial acts” (simple, factual interactions that don’t establish agency).

What Are “Ministerial Acts”?

Under Iowa Code §543B.5(1), a customer is someone “not being represented by a licensee but for whom the licensee may perform ministerial acts.”²

Ministerial acts are factual, administrative, or routine tasks that facilitate access to information or property without crossing into professional judgment or advocacy.

Examples include:

• Unlocking a listed home for an unrepresented buyer.
• Hosting an open house.
• Providing publicly available information like property disclosures, square footage, or price.

What’s not ministerial?

• Advising a buyer on what to offer.
• Preparing or presenting an offer on the buyer’s behalf.
• Negotiating inspection terms or contingencies.

Once an agent performs these non-ministerial activities, they are “working with” the buyer—and a written buyer agreement becomes mandatory.

What Does “Working With” Mean Under Iowa’s New Rules?

The new Iowa law and NAR’s 2024 rule changes require written buyer agreements when an agent is “working with” a buyer — but what does that actually mean?

According to the Iowa City Area Association of REALTORS® (ICAAR) and the Iowa Real Estate Commission (IREC):

“Working with” refers to an MLS participant providing brokerage services on behalf of a buyer — such as identifying properties not already listed with their firm, arranging showings for those properties, preparing or presenting offers, negotiating terms, or performing other advocacy services for a buyer.

This is different from a listing agent scheduling or conducting a showing of a property they already represent on behalf of the seller. In that scenario, the agent is working for the seller, not the buyer, and the act of providing access to view the property is a ministerial act.

In contrast, simply:

• Talking with a buyer at an open house,
• Providing factual information about a property, or
• Giving an unrepresented buyer access to view a home that the agent has listed

does not constitute “working with” a buyer.
These are considered ministerial acts — routine, factual services that are allowed without a signed buyer-broker agreement.

This distinction matters because some agents are incorrectly telling consumers that merely unlocking a door or showing a home now requires a signed contract. Iowa law makes it clear: that’s false unless the agent is actually providing representation.

Iowa’s Approach: Balancing Transparency and Access

The Iowa City Area Association of REALTORS® (ICAAR) clarifies the practical rule of thumb:

“ ‘Working with’ does not refer to an MLS participant simply marketing their services, talking with a buyer at an open house, or by providing an unrepresented buyer access to a property they have listed. An MLS participant performing only ministerial acts, without the expectation of being paid for those acts, is not yet working for the buyer and therefore does not yet need to enter into a written buyer agreement.”³

This means that in Iowa—and likely in other states adopting similar frameworks—a listing agent can still show their own listing to an unrepresented buyer. Doing so is considered part of the marketing duty to the seller, not a representation of the buyer.

Iowa Real Estate Commission (IREC) Rule Updates

The Iowa Real Estate Commission (IREC) adopted new rules to enforce HF 2326 and align state practice with the national settlement:

Key Administrative Provisions

1. Definition Update –
   Ministerial acts are “informative in nature and not rising to the level of specific assistance on behalf of a consumer.”⁴
2. Penalties for Non-Compliance –
   IREC may impose civil penalties up to $2,500 for failing to have a written buyer agreement signed before showing a property.⁵
3. Offer Preparation No Longer Ministerial –
   The Commission explicitly removed preparing an offer for an unrepresented buyer from the list of permissible ministerial acts.⁶

These updates mirror NAR’s broader push for commission transparency and representation clarity, ensuring consumers know exactly when they’re being represented and by whom.

The National Context: How Other States Are Responding

The NAR settlement triggered nationwide changes.
States including Missouri, Illinois, Colorado, Minnesota, and Florida are in the process of revising broker-agency rules, adopting similar buyer-agreement requirements, and clarifying what agents can do without written representation.

While details vary, the underlying themes are consistent:

• Written buyer-broker agreements before showings.
• Negotiable commission structures—not fixed by MLS or local board policy.
• Mandatory disclosure of who the agent represents.

In some states, local MLSs have already updated their listing input systems to require clear “buyer compensation” disclosures and eliminate default co-broker commission fields.

Why This Matters for CPAs and Their Clients

For CPAs, understanding these real estate changes is about more than compliance—it’s about timing, documentation, and how deals flow financially.

1. Tax Planning for Sellers

Sellers must plan for closing costs, agent commissions, and timing around capital gain exclusions under IRC §121. Knowing that commission structures may differ (especially when buyers now negotiate their own agent fees) helps anticipate net proceeds and tax exposure.

2. Entity & Deduction Strategy for Investors

Clients using LLCs, partnerships, or S-Corps for investment property acquisition will need clarity on who pays agent fees and how those expenses are allocated. A buyer-broker agreement becomes part of the substantiation record for deductibility.

3. Coordination with Lenders

Since buyers may now pay part or all of their own broker compensation, loan underwriting documentation and closing disclosures may look different. CPAs can help ensure these amounts are recorded correctly for future tax reporting.

Practical Example: Do You Really Need a Buyer Agreement to See a Home in Iowa?

Imagine a buyer sees a property on Zillow and calls the listing agent directly:

“I’m not working with anyone—I just want to take a look.”

Under Iowa’s law (and similar ones emerging nationwide), you do not need a buyer agreement to see a home in Iowa if you’re simply requesting access or asking factual questions about the property:

• The listing agent can show the home without requiring a buyer agreement.
• The agent must disclose that they represent the seller, not the buyer.
• If the buyer later asks the same agent to help write or submit an offer, the agent must have the buyer sign a written buyer-broker agreement first.

This ensures transparency without denying consumers property access.

A Real-World Example: When Access Was Denied

Recently, I contacted a listing agent in Iowa about viewing a home I was interested in purchasing.

The agent’s response was: “I can’t show you the property unless you sign an exclusive buyer-broker agreement with me for 3.5% commission. Or you can find another realtor to represent you, and they can show you the home. It’s the law — it’s required now to show any home.”

I wasn’t asking for advice, representation, or to make an offer—just to view the property.

Under Iowa law, that kind of showing is considered a ministerial act, not representation. In this case, the agent appeared to prioritize their own potential commission over the seller’s best interest—using the law’s language to pressure a prospective buyer into signing an exclusive agreement. Doing so would have created a dual agency situation, allowing the same agent to represent both the buyer and the seller, and collect commissions from both sides.

By refusing to show the home unless a commission-bearing contract was signed—and by incorrectly claiming that it was a legal requirement—the listing agent:

• Misstated the requirements of Iowa Code §543B.56A, which applies only when an agent is working with a buyer, not merely providing access on behalf of a seller.
• Restricted market exposure for their seller (potentially breaching their fiduciary duty of loyalty and diligence).
• Imposed a fixed commission structure that is not permitted under Iowa Code §543B.56A(2)(e), which requires that all brokerage compensation be negotiable.

The Iowa Association of REALTORS® and Iowa Real Estate Commission (IREC) have both clarified that providing access to a listed property, answering factual questions, or marketing a home are ministerial acts — and do not require a written buyer agreement unless the agent is representing the buyer.

In short, the listing agent could have lawfully shown the property without forcing a 3.5% buyer-broker contract. Refusing to do so—and asserting it was “the law”—not only misleads consumers but also undermines the seller’s interests. It may violate both IREC rules on client duties (193E—11.3, 193E—12.2) and NAR’s Code of Ethics, Article 1, which requires REALTORS® to protect and promote their client’s best interests while treating all parties honestly.

The Fiduciary Issue: Why Refusing to Show a Home Without a Buyer Agreement May Breach Duty to the Seller

If a listing agent refuses to show a property to a ready, willing, and able buyer simply because that buyer hasn’t signed a buyer-broker agreement, the agent could be violating their fiduciary duty of loyalty and diligence to the seller.

The seller hired the agent to market and sell the property, and that includes providing reasonable access to prospective buyers. Denying access can harm the seller’s interest and could be a disciplinary issue under IREC rules or REALTOR® Code of Ethics, Article 1.

Key Takeaways for Home Buyers and Sellers

Final Thoughts: A Nationwide Shift Toward Clarity

While Iowa’s HF 2326 sets one of the clearest examples, the same principles are spreading across the country. If you’ve been told otherwise, remember this: you do not need a buyer agreement to see a home in Iowa unless you’re asking for representation or advice. The NAR settlement’s legacy is transparency—buyers and sellers now know exactly when an agency relationship begins and what they’re paying for.

For clients buying or selling property, this means:

• Ask early who the agent represents.
• Expect to sign a written buyer agreement if you want advice or negotiation help.
• Consult your CPA before finalizing the transaction to align tax implications, financing structure, and timing.

At Corridor Consulting, we help clients navigate the intersection of real estate, tax strategy, and wealth building—ensuring each property decision aligns with a broader financial plan.

Disclaimer

This article is for general informational and educational purposes only. It is not legal advice and should not be relied upon as such. Corridor Consulting, LLC is a CPA firm, not a law firm, and does not provide legal services. Readers should consult a licensed real estate attorney or their broker for specific legal guidance regarding contracts, representation agreements, or real estate law.

Footnotes

1. Iowa Code § 543B.56A(3), as amended by 2024 Iowa Acts, House File 2326.
2. Iowa Code § 543B.5(1) (definition of “customer”).
3. Iowa City Area Association of REALTORS®, Written Buyer Agreements – FAQs (2024).
4. Iowa Real Estate Commission — Rule 193E-2.1 (2025) “ministerial acts” definition
5. Iowa Real Estate Commission, Administrative Rule Ch. 18 (2025) (civil penalty authority).
6. Iowa REALTORS®, Administrative Rules Update, Sept. 2025.

What to Do if You Believe an Agent Misrepresented the Rules

If you believe a real-estate professional has misrepresented Iowa’s buyer-agreement rules or failed to meet their ethical obligations, you have several options for reporting your concerns.

You can visit the Iowa Professional Licensing Board (PLB) to verify an agent’s license and, if appropriate, file a complaint directly through their online system and search the agents name.

Additionally you can reach out to the Real Estate Commission, as well as the Real Estate (Appraisers & Management Companies) Licensure & Complaints program at 515-725-9039 to ask about submitting a concern or filing an anonymous complaint.

James Yochum's post Do You Need a Buyer Agreement to See a Home in Iowa? NAR Explained was written for Corridor Consulting - Certified Public Accountants - Iowa.

In the bustling arena of real estate investment and management, refinancing often emerges as a shrewd tactic to amplify assets for further growth. Yet, the tax repercussions of such refinancing moves—particularly those entailing cash distributions to partners or shareholders—are intricate and frequently underestimated. Grasping the IRS’s interest tracing rules under 1.163-8T becomes crucial for individuals navigating these waters, especially when cash is distributed among partners or shareholders. Alarmingly, even seasoned professionals specializing in real estate taxes may overlook these critical tracing regulations, a mistake that could lead to unwelcome surprises during an audit.

The Basics of Interest Tracing Rules

When a real estate holding is refinanced, and the proceeds are distributed among partners or shareholders, it’s essential to be aware that the interest on the new debt may not always be deductible to the business. This nondeductible interest should be carefully documented on the partner or SH’s Schedule K-1s. The reason for this meticulous documentation stems from the necessity for each partner or SH to account for this non-deductible portion of interest when they use their distribution for further investments, such as acquiring a new rental property.

Why Every Detail Matters on the K-1

The allocation of non-deductible interest on a partner’s or shareholder’s K-1 is crucial. It informs them of the portion of interest that cannot be deducted in the business context but may still hold potential for deduction in their individual tax scenarios. For instance, if a partner uses their distributed cash to purchase and renovate a property that is then rented out, the previously non-deductible interest could become deductible against the rental income generated by the new property.

However, not all investments made with distributed funds will qualify for such a deduction. For example, purchasing personal assets, such as a yacht, with distributed funds from a refinance will not make the non-deductible interest suddenly deductible. The key lies in the usage of the funds for income-producing activities, like turning a property investment into a profitable rental business.

The Audit Risk of Ignoring Cash Out Refinancing Distributions

A common pitfall in real estate refinancing is the oversight of cash-out distributions and their tax implications. Failing to account for the non-deductible interest can lead to significant audit adjustments, especially when large sums are refinanced at high-interest rates. Even tax professionals specializing in real estate can sometimes miss these intricate details, underscoring the importance of being vigilant and informed about the interest tracing rules.

The Significance of Notice 89-35

Notice 89-35 provides optional allocation rules that can aid in matching distributions with their respective uses within the tax year, regardless of timing. This notice emphasizes the importance of segregating distributions from operations from those exclusively stemming from refinancing. Such segregation not only simplifies compliance but also ensures the accurate application of the interest tracing rules based on the actual use of the proceeds.

The Path Forward

Understanding and applying the interest tracing rules under 1.163-8T and Notice 89-35 is paramount for real estate investors and their accountants. This knowledge not only aids in tax compliance but also in strategizing investments in a way that maximizes tax benefits. By segregating and accurately tracing the use of refinanced proceeds, investors can navigate the complex tax landscape more effectively, ensuring that their real estate ventures remain both profitable and compliant.

James Yochum's post Escape IRS Catastrophe: Unravel Arcane Secrets of Interest Tracing in Property Refinancing was written for Corridor Consulting - Certified Public Accountants - Iowa.

Navigating Your Financial Journey with a Versatile CPA Firm

Let’s clear the air right off the bat: the term “Real Estate CPA” is a bit misleading. While some CPAs, or CPA Firms might focus their practice around real estate clients, it’s crucial to understand that there’s no special certification making one a “Real Estate CPA.” The National Association of State Boards of Accountancy (NASBA), which regulates CPAs in the states, doesn’t hand out titles based on industry specialization.

This distinction is more than just semantics. In fact, when someone labels themselves as a “Real Estate CPA,” it might signal a narrower experience range, particularly if they lean on this designation due to a lack of broader tax law expertise. However, this isn’t to say expertise in real estate isn’t valuable. It’s incredibly beneficial, especially since many CPAs and CPA Firms might not delve deeply into the real estate sector. For those navigating property investments or management, finding a CPA or a CPA Firm with real estate savvy can feel like striking gold.

The Broad-Scope CPA Firm: Your Financial Mechanic

Picture this scenario: You got an oil change at a fast-service oil change outlet. But the other day you thought you heard an engine knock, and experienced the car being really down on power and the check engine light coming on. You have no idea what happened, maybe it was the puddle you drove through? You mention something to the oil change shop, and they tell you to not worry about it since it’s running fine now. They did pull a diagnostic code, and it mentioned a miss fire code on a cylinder, but they don’t work on engines, and said you’d need to get service somewhere else if it happens again. You’re happy everything seems fine, and proceed to go on your road trip. Only to be broken down 500 miles away from home, with fuel injector issues diagnosed by the car dealership’s mechanic. You have no option but to have them replace the injector’s, and hope that was the only issue and not water getting inside from the air intake, and damaging the engine.

Takeaway? While quick-service stations are adequate for basic oil changes, complex automotive problems necessitate the insights of an experienced mechanic. This professional’s thorough understanding and proactive approach ensure that minor issues don’t escalate into significant ones. Imagine pulling in for a standard oil change, only for the mechanic to also scrutinize your vehicle’s alignment, brake condition, and listen for engine troubles such as a rod knock. Furthermore, they inquire about any concerns at each appointment, are capable of resolving those issues, and educate you on specific warning signs to anticipate, preventing future problems before they arise.

This comprehensive care is akin to the role a seasoned CPA Firm plays in managing your finances. While you might find “experts” promising huge tax savings through methods that tread a fine line with the IRS, it’s wiser to engage a CPA Firm with a track record of not just applying tax deductions but also successfully defending them during audits. Opt for a professional who understands the full spectrum of financial strategies, including those who specialize in tax resolution. This ensures your financial well-being is in hands that know how to anticipate and mitigate risks, much like a trusted mechanic who keeps your car running smoothly.

Versatile Taxation Expertise: Navigating Complex Financial Landscapes with Ease 

A CPA Firm with a broad experience in taxation—encompassing individual, business, estates, and trusts—can adeptly navigate real estate issues and much more. This versatility means they’re equipped to guide you through simple to complex financial landscapes, adapting their advice as your situation evolves. 

Here’s a personal anecdote to illustrate this point:

Years ago, I met with a client, let’s call him Jake, who initially sought advice on a straightforward real estate investment. Over time, Jake’s financial situation grew more complex; he started a business and began thinking about estate planning. Because we had built a relationship around his real estate investments, I was already familiar with his financial picture and could seamlessly extend my guidance to these new areas. This continuity is invaluable, saving time and ensuring that strategic decisions are made with a holistic understanding of one’s financial goals and challenges.

The Value of a Comprehensive Financial Partnership

Seeking a CPA Firm who isn’t just a “real estate” specialist but a versatile financial expert ensures that as your financial needs evolve—be it starting new businesses, diving into estate planning, or navigating tax changes—you won’t need to start from scratch with someone new. This relationship is about more than just taxes; it’s about building a financial foundation that supports all your endeavors.

When Complexity Grows

Consider the scenario where your simple real estate investment blossoms into a portfolio, or you decide to start a real estate-related business. Here, the benefit of a CPA firm skilled in various areas becomes crystal clear. They can help you strategize for tax efficiency, advise on business structure, and plan for future growth or succession.

Finding the Right CPA Firm: More Than Just a Title

In your search for a CPA, look beyond the surface. It’s easy to be swayed by niche specializations, but remember, the depth and breadth of their experience are what truly matter. Ask about their experience across different tax domains, and listen for insights that show they understand the intricate weave of personal and business financial planning.

Building Your Financial Dream Team

Your financial journey is unique, and building a team that understands and supports your goals is crucial. A CPA Firm is a central figure in this team, offering not just tax advice but strategic guidance that aligns with your aspirations.

Here’s another anecdote to drive this home: Sarah, a client who started with a single rental property, eventually turned her passion into a thriving real estate development business. Because we had established a relationship centered on broad financial strategy, I could assist her transition into this new venture, addressing both the immediate tax implications and the long-term planning considerations.

Wrapping It Up

In the end, the most effective financial guidance comes from a partnership with a CPA Firm who views your journey through a wide-angle lens. They’re not just your tax preparer; they’re your financial strategist, your advisor, and, in many ways, your teacher. This comprehensive approach ensures that no matter how your financial landscape shifts or expands, you have a trusted guide by your side, ready to navigate the complexities and celebrate the victories.

Remember, while the term “Real Estate CPA” might catch your eye, the true value lies in a CPA Firm’s overall expertise and their ability to adapt to your evolving financial narrative. Choose wisely, and set the course for a prosperous financial future.Y

James Yochum's post The Myth of the “Real Estate CPA” How To Find a Versatile CPA Firm was written for Corridor Consulting - Certified Public Accountants - Iowa.

Understanding Passive vs. Non-Passive Real Estate Activities: A Focus on Airbnb and the 7-Day Rule

In the complex world of real estate taxation, especially for Airbnb rentals, distinguishing between passive and non-passive income is crucial. This distinction is made often-times before it is too late, because many tax professionals are issuing guidance to prospects and clients, that just brush upon the tax law as written. They do not take the time to analyze clients particular facts and circumstances, and integrate them with the tax laws as written. The Internal Revenue Code (IRC) Sections 469 and 1402 play pivotal roles in the determination of how rental income is taxed and reported. This article delves into these distinctions, highlighting the unique considerations for Airbnb properties and the implications of the 7-day rule.

What you’ll find here, is that there is no black and white answer, and everyone’s situation can have a very different outcome. This is worth a read if you have any rental or business activity – you will learn something you didn’t know and likely your accountant or tax professional has never touched on with you before. The topics here, present a critical understanding of the tax code, and if you do not understand you are going to be missing out.

Passive vs. Non-Passive Income: IRC Section 469

1. Defining Passive and Non-Passive Activities: IRC Section 469 categorizes income-generating activities into passive or non-passive. Passive activities are typically those in which the taxpayer does not materially participate, and the losses incurred can only offset passive income. Non-passive losses, however, can offset various types of income, including wages and investment income.
2. Form 8582 and Passive Activity Losses: Form 8582 is used to aggregate passive activities, determining the net passive income or loss. This form is pivotal in understanding the overall impact of passive activities on a taxpayer’s obligations.
3. Rental Activities and the 7-Day Rule: According to 1.469-1T(e)(1)(ii), a rental activity is generally passive unless one of the specific exceptions applies (Real Estate Professional, or self-rental status applies, any other material participation tests do not matter). However, an activity is not considered a rental activity if the average customer use is 7 days or less. This means that Airbnb properties with an average stay of under 7 days do not automatically qualify as rental activities, and thus do not automatically qualify as passive activities under IRC section 469.
   • Example 1: Tim owns an Airbnb in Iowa City, Iowa, his stay’s are typically 3 days or less throughout the year. Because the stays are less than 3 days throughout the year, Tim’s Airbnb does not qualify as a rental activity under section 469 which would have qualified it to be treated as a passive activity under IRC Section 469, and thus Tim’s Airbnb activity is considered non-passive. If he experiences any losses running his Airbnb he can offset those losses against various types of income on his tax return.
   • Example 2: John owns an Airbnb in Iowa City, Iowa. John’s stay’s are typically 14 days or more throughout the year. Because his stays are more than 7 days throughout the year, John’s Airbnb does qualify as a Rental Activity under Section 469, which means it is treated as a passive activity under IRC Section 469.
4. Material Participation Tests: If an Airbnb property meets the definition of a passive rental activity under Section 469, the material participation tests (Real Estate Professional Status, or Self-Rental Rules) should be looked at to determine if it could be considered non-passive.
   • Example 2 Above: John’s Airbnb automatically qualifies as a rental activity based on the 7 day rule, because his average stays are 14 days or more. This means that the Airbnb is considered a rental activity, and thus will be treated as a passive activity.
     • BUT WAIT– This is not the outcome John would like to see, because generally passive losses may only offset passive income. Non-passive losses can offset ALL TYPES of income – passive, investment, W2 wages, etc…
     • Exception to the rule: we can look to the material participation tests to determine if it is passive or non-passive.
       • Test 1- Real Estate Professional
         • If the taxpayer is a REP, the taxpayers real estate activity escapes the per se rule otherwise applicable to rental activity.
         • A taxpayer will be considered a real estate professional if (1) more than one-half of the total personal services the taxpayer performs in trades or businesses are performed in real property trades or businesses in which the taxpayer materially participates and (2) the taxpayer performs more than 750 hours of services during the tax year in real property trades or businesses in which the taxpayer materially participates. Ideally, taxpayers should prepare contemporaneous time logs that detail the services rendered.
         • For purposes of determining whether a taxpayer is a real estate professional, the taxpayer’s material participation is determined separately for each rental property, unless the taxpayer makes an election to treat all interests in rental real estate as a single rental real estate activity.
       • Test 2- Self-Rental
         • If John were to rent this Airbnb for the whole year, to a business entity he owns, Section 469 also covers the treatment of the self-rental transaction- it essentially treats the income as non-passive because the owner materially participates in the operating lessee entity. This rule allows Businesses to have a separate entity hold their Real Estate, but ultimately allows them to treat the the transaction as though they retained the real estate in the same entity as the business operations. Since the income (or loss) of the business operations would be non-passive, the income form the siphoned off RE activity should also be non-passive.
         • One thing to note about this provision, it does not cover any loss that may arise from the rental activity. Under the self-rental rule, the rental losses are still considered to be PASSIVE losses deductible only to the extent of PASSIVE income, while the income is treated as “active income”- Noted in (Carlos, 123 TC 275 (2004))
     • Let’s say John has a lot of Airbnb’s like the one listed in Example 2- So much so that if John elects to treat all interests in the Airbnb’s as a single activity, and that activity totals more than 750 hours of service during the tax year, John’s portfolio of Airbnb’s are considered non-passive, and any losses can offset other income!
5. Reporting Non-Passive Rentals: Non-passive rental activities are not reported on Form 8582 and can be listed on Schedule E.

Self-Employment Tax and Schedule C Reporting

1. Separation from Passive Activity Determination: The question of whether Airbnb activities are subject to self-employment tax is independent of the passive vs. non-passive determination. This is where the substantial services test comes into play.
2. IRC Section 1402 and Rental Income: Generally, rentals from real estate are exempt from self-employment tax. Exceptions exist for rentals where significant services are provided to the occupant, which are not customary in typical real estate rentals. If you provide a maid service to your Airbnb guests, or other significant services- you have an activity that is subject to SE Tax.
3. No Specific Time Requirement: There is no time requirement here, under 7 days and under 30 days doesn’t matter. You could have long-term tenants and if you provide significant services you have a rental activity that is subject to SE tax!
   • An example of this would be if you are an attorney, and you have space you rent out to other attorney’s while offering to support their back office, the rental income you receive from them is subject to S/E tax, because you are providing significant services in conjunction with the rental activity.

The 199A Deduction and Airbnb

1. Qualifying for the 199A Deduction: Determining whether a rental or Airbnb activity qualifies for the 199A deduction under the Tax Cuts and Jobs Act (TCJA) is a separate consideration. It requires the activity to be regular, ongoing, and profit-motivated. Material participation and payment of self-employment tax are not prerequisites for this deduction.
2. Various Scenarios for Airbnb Properties:
   • An Airbnb with average stays over 7 days without significant services may be passive, reported on Schedule E, and might qualify for the 199A deduction.
   • Airbnb with shorter stays under 7 days, no significant services, and owner participation could be non-passive, also on Schedule E, with potential 199A eligibility.
   • Airbnb with short stays and significant services, involving owner participation, are likely non-passive, reported on Schedule C with self-employment tax, and may qualify for the 199A deduction.

Understanding the nuances of passive vs. non-passive income, especially in the context of Airbnb rentals, is essential for accurate tax reporting and optimization. The 7-day rule under Section 469 and the considerations for self-employment tax under Section 1402 provide a framework for property owners to navigate these complexities. As always, consulting with a tax professional is advisable to ensure compliance and strategic tax planning.  Content is for education and information only. This is not advice of any kind. Please consult an Attorney or Certified Public Accountant.

James Yochum's post Understanding Passive vs. Non-Passive Real Estate & Business Activities, and Navigating Self-Employment Taxes: A Focus On Airbnb And The 7-Day Rule was written for Corridor Consulting - Certified Public Accountants - Iowa.

The US Federal Housing Finance Agency’s (FHFA) recent decision to revamp federal rules on mortgage fees has stirred controversy, with concerns raised about the impact on high-credit buyers. The new rules will offer discounted rates for homebuyers with riskier credit backgrounds, while forcing higher-credit homebuyers to pay higher costs, which has been met with criticism from the mortgage industry. In this article, we will delve into the FHFA’s changes and explore the potential effects on the housing market and mortgage industry.

What are the Changes to Mortgage Fees?

Fannie Mae and Freddie Mac, government-sponsored enterprises that buy and resell loans, will adjust fees known as loan-level price adjustments (LLPAs) from May 1, 2023. The changes will affect mortgages originating from private banks nationwide, from Wells Fargo to JPMorgan Chase. The fees are upfront fees that factor in borrowers’ credit scores and down payments and are typically converted into percentage points that alter the buyer’s mortgage rate. Under the revised pricing structure, high-credit buyers with scores ranging from 680 to above 780 will face a spike in their mortgage costs, with applicants who place 15% to 20% down payments experiencing the biggest increase in fees. Meanwhile, buyers with credit scores of 679 or lower will have their fees slashed, resulting in more favorable mortgage rates.

The FHFA-ordered overhaul of LLPAs affects purchase loans, limited cash-out refinances, and cash-out refinance loans. The revamped pricing matrix also includes the controversial addition of a new charge for buyers with debt-to-income ratios above 40%. However, FHFA announced last month it would delay the rollout of the debt-to-income fee until at least August 1, to “ensure a level playing field for all lenders to have sufficient time to deploy the fee.”

The FHFA’s Aim to Boost Affordability

The changes to mortgage fees are the latest of several moves by the FHFA aimed at boosting affordability for “mission borrowers,” defined as first-time buyers, low-income borrowers, and applicants from underserved communities. Last year, the FHFA eliminated upfront fees for first-time buyers who are at or below 100% of their area’s median income, or 120% in areas that are identified as “high cost.” The agency also raised upfront fees on second homes and some larger mortgage loans.

The FHFA’s intention to boost affordability for those in need is admirable, but the question is whether the new pricing structure will achieve this goal. Critics suggest that the changes may add more pressure on a core segment of buyers in a housing market already in the midst of a major downturn, and high-credit buyers may be hit harder than expected.

Impact on High-Credit Buyers

High-credit buyers may be the hardest hit by the new pricing structure. They may face pricier monthly mortgage payments, which could come as an unwelcome surprise for those who worked for years to build their credit. The new pricing structure will be a challenge to explain to high-credit buyers, who may find it hard to accept that their credit quality is now a disadvantage. However, the FHFA official responded to concerns by saying that the agency was “tasked with ensuring [Fannie and Freddie] fulfill their role in any market condition,” adding that shifts in long-term mortgage rates are a far bigger factor in determining finance conditions in the US housing market.

The Mortgage Industry’s Reaction

The mortgage industry has been quick to criticize the changes to mortgage fees. The new pricing structure is a significant cross-subsidy pricing change that impacts high-credit buyers negatively, according to David Stevens, the former CEO of the Mortgage Bankers Association. The changes could further complicate the strenuous mortgage application process and add more pressure on a core segment of buyers in a housing market already in the midst of a major downturn. The timing of the changes has also been called into question, as they come at a time when home purchases are impacted by rate increases over the past year, making the situation less than ideal.

Moreover, the mortgage industry is concerned that the changes may complicate the mortgage application process, as lenders will have to adjust their pricing matrix to accommodate the new fees. Lenders will also have to reconfigure their systems to determine the fees charged to borrowers accurately. These changes could result in more work for lenders, which may ultimately increase the cost of originating a mortgage.

Potential Effects on the Housing Market

The impact of the changes to mortgage fees on the housing market is yet to be seen. However, there are concerns that the changes may worsen the already-strained housing market. The average 30-year mortgage rate is hovering at 6.27% as of last week, up from about 5% one year ago and more than twice as high as it was two years ago, according to Freddie Mac data. With higher mortgage rates, the cost of borrowing becomes more expensive, making it harder for borrowers to afford a mortgage.

The changes to mortgage fees may also exacerbate the current housing affordability crisis, as home prices continue to soar, and low- and middle-income households struggle to buy a home. While the FHFA’s intention to boost affordability for mission borrowers is commendable, the new pricing structure may have the opposite effect, making it harder for some buyers to afford a home.

The End Result

The FHFA’s decision to revamp federal rules on mortgage fees has stirred controversy, with concerns raised about the impact on high-credit buyers. The new pricing structure will offer discounted rates for homebuyers with riskier credit backgrounds, while forcing higher-credit homebuyers to foot the bill. While the FHFA’s intention to boost affordability for mission borrowers is commendable, the new pricing structure may have unintended consequences, making it harder for some buyers to afford a home.

If you need any help regarding these issues Corridor Consulting would love to help, please schedule a discovery session here, and we’ll be able to address these issues and much more! We’re looking forward to opening many more doors for you!

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This article is not professional tax or legal advice for your specific circumstances. Consult with your professional adviser to better understand how these items may impact you, or how they’ve changed

James Yochum's post The Unfair Punishment Of High-Credit Homebuyers – Starting May 1st, 2023 was written for Corridor Consulting - Certified Public Accountants - Iowa.

Real estate is a lucrative industry with a vast array of opportunities for investment. From rental portfolios to flipping properties, there are numerous ways to make money in this industry. However, as with any business, it is essential to consider the benefits of hiring a Certified Public Accountant (CPA). While many people assume that CPAs are only necessary for tax purposes, their expertise goes far beyond this area. A CPA can offer invaluable insights into streamlining your business, reducing tax liabilities, and reducing stress, among other benefits.

Reducing Tax Liability

While it may seem obvious, reducing your tax liability is a key benefit of hiring a CPA. A CPA with a tax specialty can provide you with expert advice on how to take advantage of all the deductions available to you. This is important because the tax code and regulations are complex, and it is easy to miss out on opportunities to reduce your tax bill. For new clients who haven’t previously used a CPA, the benefits can be even more significant. This is because they may not have been operating in a tax-efficient manner, and a CPA can identify areas where they can make significant savings.

For example, a CPA who specializes in real estate can assist flippers, developers, and realtors who haven’t previously hired a CPA or accidentally hired the wrong one. When a CPA calls them up and explains that they have found a way to save them $5,000 to $10,000, they will likely become a loyal client going forward. On the other hand, not hiring a CPA can be costly, and it is easy to overlook deductions or make mistakes that result in penalties.

Growing Your Business

CPAs are often seen as tax experts that you only visit once a year to hand over a bunch of documents. However, this perception is changing, and good CPAs are bringing business and financial knowledge to the table. A great CPA will not only help you with your taxes but will also provide valuable advice on how to streamline your business as it grows.

For instance, a CPA firm that specializes in real estate investing can advise you on tax issues, help you craft tax strategies, and prepare your tax return. However, they can also add value by helping you automate, streamline, and grow your portfolio or businesses month after month. By doing so, you can focus on what you are good at, freeing up time and resources to grow your business.

A great CPA will also be constantly experimenting with their own business, which they can pass on to their clients. This means that you are not only tapping into deep business knowledge and expertise, but you are also benefiting from a professional who is always seeking to improve and grow their business. If you are new to business or real estate investing, hiring a CPA early on can help you grow much faster than you could on your own.

Reducing Stress

Navigating complex business planning and entity structuring laws or handling IRS inquiries can be stressful. However, when you have a professional CPA on your team, the process becomes much easier. A CPA can help you understand the laws and regulations, create a plan of action, and assist you with any issues that arise.

It is important to seek help early to avoid putting yourself in a difficult situation. Clients who wait until the IRS is knocking at their door to seize their assets are putting themselves in a precarious situation. By hiring a CPA early on, you can reduce stress and ensure that you have a professional to assist you with any issues that may arise.

Choosing the Right CPA

When choosing a CPA, it is essential to ask for examples during the initial consultation. This will help you to determine whether they have the expertise you need and whether they are a good fit for your business. Additionally, it is important to consider their experience and qualifications. A CPA who specializes in real estate, for example,

will likely be more knowledgeable about the specific tax and accounting issues that affect your business.

Another factor to consider is their level of engagement with their clients. A good CPA should not only be available to answer questions and provide advice, but also actively seek ways to help you improve your business and financial situation. Look for a CPA who is proactive, communicative, and takes the time to understand your unique needs and goals.

Lastly, don’t forget to consider the fees involved. While it’s important to choose a CPA who can provide the services you need, it’s also essential to find someone who is affordable and transparent about their pricing structure. Make sure to ask about fees upfront and clarify any questions you may have before committing to a CPA.

In summary, hiring a CPA can offer numerous benefits for your real estate business, including reducing your tax liability, helping you grow your business, and reducing stress. Take the time to choose the right CPA for your needs, and you can enjoy the peace of mind that comes with knowing your finances are in good hands.

If you need any help regarding these issues Corridor Consulting would love to help, please schedule a discovery session here, and we’ll be able to address these issues and much more. We’re looking forward to opening many more doors for you!

If you found this article helpful and enjoyed it please share it with others and join our newsletter below

This article is not professional tax or legal advice for your specific circumstances. Consult with your professional adviser to better understand

James Yochum's post The Unconventional Power of Hiring an Expert CPA for your Real Estate Business: Minimize Tax Liability, Maximize Growth, and Relieve Stress was written for Corridor Consulting - Certified Public Accountants - Iowa.

Real estate start-up costs can be tricky for amateur investors to navigate. In this article, we’ll explore the common mistakes made by these investors, including a lack of understanding of what costs are included in real estate start-up expenses, assuming that the purchase price of a rental property is deductible, and deducting travel and exploration expenses.

Not all costs are considered start-up costs that an investor can elect to deduct or amortize. It’s important to know which costs can be considered start-up costs and which ones must be capitalized and added to the basis of future rentals. Real estate start-up costs must meet two criteria: first, they must be expenses that you could generally deduct if you already had the rental in service; and second, they must be incurred before the property is placed in service.

A rental property is placed in service when it is advertised for rent. If on the day of closing, there are already tenants in the property, the rental is placed into service on that day. Otherwise, it’s placed into service the day a sign is placed in the front yard or when an advertisement is placed on Craigslist. Examples of costs that qualify as real estate start-up costs include analysis or survey of potential markets, advertisements for tenants or mailers to find distressed sellers, fees paid to receive legal, accounting, and other professional services, and travel and exploration costs.

Some costs do not qualify, including deductible interest, taxes, and research or experimental costs. If these costs are incurred before purchasing the rental, they will need to be amortized.

The cost to purchase a property is not considered one of the qualifying real estate start-up costs. When you purchase a rental property, you won’t be granted a big write-off for the purchase price. This is because purchasing a rental property is seen as moving money from pocket A to pocket B. You can think of the new property as a personal “bank” and the money you invested as sitting in that bank’s savings account. Writing off the purchase price of a rental property can lead to a full-blown audit, as well as recognizing the entire sale as income if the property is sold later.

Travel and exploration expenses are non-deductible if they are incurred outside of your tax home and you don’t have a rental property in the general geographic location of where you are traveling to. These expenses won’t qualify as real estate start-up costs, currently deductible expenses, or be added to the basis of your future rental unless the rental is within the same geographic location where you incurred the travel costs. Your “tax home” is the general area in which you live and work.

Many amateur investors make mistakes when it comes to treating expenses properly and tax reporting. It’s crucial to understand the criteria for real estate start-up costs, what is and isn’t deductible, and when to amortize expenses. Working with a CPA Firm can add immense value and prevent audits and legal issues in the future.

If you need any help regarding these issues Corridor Consulting would love to help, please schedule a discovery session here, and we’ll be able to address these issues and much more! We’re looking forward to opening many more doors for you!

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James Yochum's post Real Estate Start Up Costs: Common Mistakes Made was written for Corridor Consulting - Certified Public Accountants - Iowa.

With Section 1031, you can avoid taxes on all your property upgrades during your lifetime and then pass the property to your heirs when you die. The heirs receive the property with a step-up to fair market value, and they can likely sell the property and pay no taxes.

1031 Exchange Overview

The 1031 exchange, or like-kind exchange, has been around since the Revenue Act of 1921. Its purpose is simple: allowing you to swap a business asset without there being a taxable event, because your economic position hasn’t really changed.

The basics of a 1031 exchange are pretty straightforward:

• Before you sell the old asset, you must begin the exchange by contracting with a qualified intermediary.
• You may list up to three potential replacement assets within 45 days of the sale of your qualified asset.
• You must close on at least one of those three identified assets within 180 days of the sale.
• For the exchange to be fully tax-free, you must acquire a new asset of greater value than the one you’re selling. If you don’t trade up, you’ll likely have some taxable gain.

IRC Section 1031(a) provides that no gain or loss is recognized on the exchange of real property held for productive use in a trade or business or for investment (relinquished real property) if the relinquished real property is exchanged solely for real property of a like kind that is to be held either for productive use in a trade or business or for investment (replacement real property).

Such Section 1031 assets include, among others:

• Residential or commercial real estate held for investment, rental, or business use
• Raw land held for investment
• Tenant-in-common-held real estate
• Delaware statutory trust interests

Assets that don’t qualify for Section 1031 include:

• Securities, stocks, and bonds
• Partnership interests
• Assets held as inventory
• Personal-use real estate
• Foreign real estate

If you need any help regarding these issues Corridor Consulting would love to help, please schedule an individual consultation here. We’re looking forward to opening many more doors for you!

If you found this article helpful and enjoyed it please share it with others and join our newsletter below

This article is not professional tax or legal advice for your specific circumstances. Consult with your professional adviser to better understand how these items may impact you, or how they’ve changed

James Yochum's post What is a 1031 Exchange for Real Estate? was written for Corridor Consulting - Certified Public Accountants - Iowa.

That’s a good question.

In Chief Counsel Advice (CCA) 202151005, the IRS opined on this issue.

But before we get to what the IRS said, understand that the CCA’s conclusions cannot be cited as precedent or authority by others, such as you or your tax professional.

Even so, we always consider what the CCA says as semi-useful information, so here’s some analysis that goes beyond what the IRS came up with.

The Exact Question

To be specific, the CCA asks whether net income from renting out living quarters is excluded from self-employment income under Section 1402(a)(1) when you’re not classified as a real estate dealer.

If excluded under IRC Section 1402(a)(1), you don’t owe self-employment tax on your net rental income. Needless to say, that’s the outcome you want to see, and I’m here to help.

The taxpayer addressed in this CCA was an individual who owned and rented out a furnished beachfront vacation property via an online rental marketplace (such as Airbnb or VRBO).

The taxpayer provided kitchen items, linens, daily maid service, Wi-Fi, access to the beach, recreational equipment, and prepaid vouchers for rideshare services between the rental property and a nearby business district.

The CCA’s Conclusions

According to the CCA, when you’re not a real estate dealer, net rental income from renting out living quarters is considered rental from real estate and is therefore excluded from self-employment income—as long as you don’t provide services to rental occupants.

The self-employment income exclusion for net rental income collected by a non-dealer is a statutory provision. The statute itself doesn’t say anything about providing services.

But IRS regulations state that providing services to renters can potentially cause you to lose the exclusion from self-employment income.

According to the CCA, you must include the net rental income in calculating your net self-employment income—which could cause you to owe the dreaded self-employment tax (ugh!)—if you provide services to renters and the services

• are not clearly required to maintain the living quarters in a condition for occupancy and
• are so substantial that compensation for the services constitutes a material portion of the rent.

So, according to the CCA, determining whether providing services to renters will trigger exposure to the self-employment tax is the big issue for folks who rent out living quarters.

The CCA’s anti-taxpayer conclusion rests on the giant assumption that the services provided by the taxpayer were above and beyond what was required. But were they? Probably not!

The Customarily Issue

According to IRS regulations, services are generally considered above and beyond the norm only if they exceed the services that are customarily provided to renters of living quarters.

Therefore, services that simply maintain a vacation rental property in a condition that is customary for rental occupancy should not be considered above and beyond and therefore should not trigger exposure to the self-employment tax.

In assessing whether services provided to renters are above and beyond what’s customary, circumstances obviously matter.

In the real world of vacation rentals in expensive resort areas, renters customarily expect and receive lots of services that might be considered above and beyond in other circumstances.

For instance, in resort areas, renters customarily expect and receive cable service; Wi-Fi access; periodic housekeeping services, including changing bedding and towels; repair of failed appliances; replacement of burned-out lightbulbs; replacement of dead smoke alarm batteries; access to recreational equipment such as bicycles, kayaks, beach chairs, umbrellas, and coolers; and so forth and so on. That’s a lot of services!

Why are lots of services provided in expensive resort areas? Because rental charges in expensive resort areas are—wait for it—expensive! The cost may be $2,000 or more per week or $5,000 or more per month, or even higher during peak periods—maybe much higher! So, rental amounts that could be attributed to the provision of all the aforementioned services would almost always be a small fraction of the overall rental charges.

In the context of expensive resort area vacation rentals, it’s hard to imagine what services would be so above and beyond the norm that the property owner’s net rental income would be exposed to the self-employment tax.

It shouldn’t matter if the services are provided directly by the owner of the property (unlikely) or indirectly by a rental management agency and included as part of the fee paid by the owner of the property (likely).

The Substantiality Issue

In assessing whether services provided to renters are above and beyond the norm, substantiality also matters.

A Tax Court decision addressed a situation where the taxpayer rented out trailer park spaces and furnished laundry services to tenants. The laundry services were clearly provided for the convenience of the tenants and not to maintain the trailer park spaces in a condition for rental occupancy. Tenants were not separately billed for the laundry services, and they were not separately paid for.

The Tax Court concluded that any portion of the rental payments that was attributable to the laundry services was not substantial enough to trigger exposure to the self-employment tax. Accordingly, the Tax Court opined that all of the trailer park owner’s net rental income was excluded from self-employment income.

As stated above, in the context of the rental of expensive vacation properties, any portion of rental charges that could be attributed to the provision of services would likely be insubstantial in relation to the overall rental charges. If so, according to the Tax Court, the provision of such services would not expose the property owner to the self-employment tax.

If you need any help regarding these issues Corridor Consulting would love to help, please schedule an individual consultation here. We’re looking forward to opening many more doors for you!

If you found this article helpful and enjoyed it please share it with others and join our newsletter below

This article is not professional tax or legal advice for your specific circumstances. Consult with your professional adviser to better understand how these items may impact you, or how they’ve changed

James Yochum's post Is Your Airbnb Rental Income Subject to Social Security & Medicare Taxes? was written for Corridor Consulting - Certified Public Accountants - Iowa.