Buying real estate, create LLC? Bloody taxes.....

[HardDrive]

My wife and I will be buying some rental property this, year. Our primary goal is reducing our taxes.

It has been suggested to me that I form a separate LLC for each piece of property. The idea is to shelter both our family, as well as the other properties from liability in the case of a law suit.

I'm all for this, but will this have any effect on our ability to reduce our tax liability?

In addition, I am open to nearly ANY suggestion that will not land me if jail for reducing taxes.

Anyone invest in oil exploration?

[jorian]

What kind of law suit? I carry all-risk insurance with 5 million liability. My family has been in this biz for over 50 years with over 250 'doors' and has never been sued.

The primary advantage of holding a property in a company rather than personally is to allow a share sale at dispostion and mitigating capital gains taxes.

Edit: This is a Canadian perspective. Our tax system is different (ie we pay alot more!) and we don't sue each other as often.

[Scooter]

HardDrive, you have a PM.

[pbs911]

I don't know if that will work from a tax sperpective since the corp will be taxed on its income and you will be taxed on your income. It seems the copr would benefit from the taxes. Some states do allow LLCs allow the same taxation as a LLP. You need to check with the laws in your state.

Depending on the law suit a LLC may not shelter your or your property from judgments.

I would seriously suggest plopping down a grand and getting advise from an attorney.

[RANDY P]

Good luck getting financing under an LLC - if you do, you'll pay for it.

[VaSteve]

Originally posted by pbs911

I would seriously suggest plopping down a grand and getting advise from an attorney.

Talk to a CPA :P (Then again, try finding one this week.)

You'd probably set up an S corp, which is a flow through entity. Rental income is a passive activity unless you're in it full time. If your AGI is over $150K all the losses you produce will be eliminated. Check out pub 8283 (I think - if I have to loko it up I'll charge you on Passive Activties.

[turbo6bar]

Originally posted by HardDrive
My wife and I will be buying some rental property this, year. Our primary goal is reducing our taxes.

It has been suggested to me that I form a separate LLC for each piece of property. The idea is to shelter both our family, as well as the other properties from liability in the case of a law suit.

I'm all for this, but will this have any effect on our ability to reduce our tax liability?

The LLC passes on income to your wife and yourself. With regards to taxes, this is no different than owning the properties in your own name.

Personally, and I know you didn't ask, but owning properties in an LLC is overrated. Maintain your properties, take care of any hazards in reasonable fashion, and your liability is reduced immensely. Carry insurance on each property + an umbrella policy. A $2M umbrella is a few hundred bucks a year.

In addition, I am open to nearly ANY suggestion that will not land me if jail for reducing taxes.

Anyone invest in oil exploration?

motion mentioned oil exploration in another thread. It might have promise, but with oil companies sitting on mountains of cash, don't you think they would fund exploration?

As VAsteve mentions, your passive losses are restricted to $25k/year and it is phased out at high incomes. You may carry the losses foward to wash out future passive gains or capitals gains (in the event of a property sale).

Unfortunately, the deductions aren't great. RE is best viewed from a window looking far into the future.
I wish you the best of luck.
jurgen

[carnutzzz]

Sorry guys- but some are giving bad advice here.

Yes, an LLC is great for protection- each LLC should protect 1-3 properties.

You create a sole-proprietor LLC, which means it does not pay any taxes. Taxes are all claimed on your personal forms. Schedule E specifically which covers rental income/expenses.

You would not finance through the LLC- LLC's don't have credit, you do. You would secure financing yourself, then transfer the title of the property to the LLC.

Yes- professional advice is necessary before going too far.

Wil you avoid taxes? Depends- but not really.

Think about it- you rent it out for $1k a month x 12 months. That's another $12k in income for you for the year- that hasn't been taxed yet! Sure, you'll create expenses to offset that, but this isn't exactly the holy grail of tax-free income.

[turbo6bar]

thanks for setting us straight.

[VaSteve]

Originally posted by carnutzzz
You would not finance through the LLC- LLC's don't have credit, you do. You would secure financing yourself, then transfer the title of the property to the LLC.

That's not necessarily true. You can have a big company that's an LLC.

Originally posted by carnutzzz

Yes- professional advice is necessary before going too far.

Wil you avoid taxes? Depends- but not really.

Think about it- you rent it out for $1k a month x 12 months. That's another $12k in income for you for the year- that hasn't been taxed yet! Sure, you'll create expenses to offset that, but this isn't exactly the holy grail of tax-free income.

Tax codes have been implemented to cut down on this stuff by people trying to shield income with appreciating property - best of both worlds, eh?

Carnutzz is correct. The real way to generate that loss that you can use against your income is to depreciate the property (in the tax sense) over the 27.5 years allowed. Guess what happens when you try to sell, major gain! Thus you have to buy another investment property (or some other business asset) in a 1031 like kind exchange. (There are people that actually link people up looking to make these kinds of trades). You pay taxes on any of the gain your realize in cash (ie. not a straight trade).

This is the reason there are a lot of old ladies sitting on renatl properties, if they sell them, they are in a world of hurt tax wise.

I can't comment on having a bunch of LLC's. Sounds like some of these RE books' nonsense, but it may be different in your state. When I was renting out we attended a seminar. The Atty that put it on recommended owning in your name. You could own up to four. Then your spouse could own four in her name, etc.

[turbo6bar]

Originally posted by VaSteve
Carnutzz is correct. The real way to generate that loss that you can use against your income is to depreciate the property (in the tax sense) over the 27.5 years allowed. Guess what happens when you try to sell, major gain! Thus you have to buy another investment property (or some other business asset) in a 1031 like kind exchange. (There are people that actually link people up looking to make these kinds of trades). You pay taxes on any of the gain your realize in cash (ie. not a straight trade).

If you generate losses, though, they will carry forward to offset such gains in the future. This seems to eliminate Harddrive's desired tax deductions NOW. This assumes Harddrive isn't ready to head into landlording now and put in 750 hours per year...

Randy is right about financing under the LLC. Eventually, one would like to see the LLC stand on its own and qualify for mortgages. However, this is not something to consider now.

I can't comment on having a bunch of LLC's. Sounds like some of these RE books' nonsense, but it may be different in your state. When I was renting out we attended a seminar. The Atty that put it on recommended owning in your name. You could own up to four. Then your spouse could own four in her name, etc.

Not hearing the attorney's remarks, I must speculate on his four properties per name advice. In the past, FHA would underwrite four mortgages per SSN. Qualify four mortgages under yourself. Qualify four mortgages for your spouse. After you hit four mortgages per social security number, you get conventional mortgages. Sounds fine, but this was all good BEFORE the massive growth in the lending industry. These days, there are so many lenders and so many programs that going FHA isn't all that special.

Randy P, am I close on that or is the hashish still doing the talking?

[RANDY P]

Originally posted by turbo6bar


Randy P, am I close on that or is the hashish still doing the talking?

pretty much correct - however it's going to be stiff to qualify under FHA guidelines -

FHA is sort of a dinosaur these days - conventional offerings will give you similar rates but without the MI that FHA makes you take, also the amount you can borrow vs. income (AKA debt to income ratio) with conventional is much more, not to mention it's generally an easier process .

There are a LOT more offerings under conventional guidelines that will literally blow FHA off the map. FHA also requires a minimum cash investment / down payment to qualify.

2nd Biggest issue I see here would be getting preferred rates if you have multiple properties -

- Debt servicing - do you have enough active income (taxable income reported) to support multiple properties, even with rental income?

- amount of downpayment. You pretty much have to have stellar credit to even think about a low downpayment scenario buying a property labeled as an "investment" property. If the bank notes multiple mortgages on the credit report, they will ask where the properties are, and assume that if they are all local - YOU LIVE IN THE MOST EXPENSIVE ONE. Even if truthfully, you tell the bank you are moving into a less expensive property. If there is a more expensive one that you own in the area, they will assume you will always live in that one, and bill you accordingly.

'If the property is in another state for instance, you can get away with calling it a 2nd home which will get you better rates and less downpayment requirements.

Therefore, multiple properties will be an issue to finance if you are wishing for "conforming" rates. typically expect anywhere from a 1% to 2.5% hike in rates across the board buying under the "investment" flag. Also, unless you are an absolute stud with mucho cash flow, you'll probably have to go "stated" which will add at least.75% to the rate as well, so expect it.

Most lenders don't care how many properties a person may own (or at least what's showing on the credit report ) but are mostly concerned with how many properties THAT PARTICULAR lender has that you control already. Most lenders from what I seen will only allow up to 4 properties financed through the same bank.

There are very creative ways around it, more on that later.



rjp

[greglepore]

Carry big insurance, forget the LLC complications, unless its a large multiple unit building. That's what I advise my clients. Its "against the mainstream" advice, but then again, I'm losing 400 bucks or so pure profit every time I don't set up an LLC.

BTW, if you do go that route, most states allow you to register it online, and you can find a simple management agreement very easily.

[GDSOB]

Originally posted by greglepore
Carry big insurance, forget the LLC complications, unless its a large multiple unit building. That's what I advise my clients. Its "against the mainstream" advice, but then again, I'm losing 400 bucks or so pure profit every time I don't set up an LLC.

BTW, if you do go that route, most states allow you to register it online, and you can find a simple management agreement very easily.

Didn't you mean "gaining $400 of pure profit"?

I tend to agree with not setting up the LLC for up to 4 properties. The LLC makes you an officer of the corporation and you need an attorney to represent you in legal manners such as evictions. You can easily represent yourself in evictions if you own them personally.

Most banks require personal guarantees to properties bought in LLC's so the credit protection is not their either.

Ditto on Insurance. Check into a blanket liability policy if you own several properties.

[VaSteve]

Originally posted by turbo6bar

Not hearing the attorney's remarks, I must speculate on his four properties per name advice. In the past, FHA would underwrite four mortgages per SSN. Qualify four mortgages under yourself. Qualify four mortgages for your spouse. After you hit four mortgages per social security number, you get conventional mortgages. Sounds fine, but this was all good BEFORE the massive growth in the lending industry. These days, there are so many lenders and so many programs that going FHA isn't all that special.

That sounds about right. It was a few years ago and we'd already owned the property so it didn't apply. But that's probably what he was talking about.

[HardDrive]

Man, thanks guys. You guys seem to be disagreeing with each other, but a least we are getting all the issues on the table.

Our income is over 150k. So I can not write off ANY losses!?!?!?! Arg.

Hmmmmmm......but can't I buy all sorts of 'materials' and perhaps even a vehicle, to ensure that I don't make a profit. If I buy truck that is only used for property managment (and pulling my boat trailer *AHEM* ), can't I write off the payments?

What about interest form the additional mortagages. I know its only a percentage, but I can write that off to, correct?

[dad911]

You can buy/right off whatever you want until you get audited......

[VaSteve]

If your purpose for doing this is to build a RE empire, it might be worth it. If it is to shield some of your active income (your stated purpose) it doesn't make sense to go through with it, especially since you're topped out at > $150K.

If you want a boat hauler, take out a home equity loan.

[turbo6bar]

Originally posted by HardDrive
Our income is over 150k. So I can not write off ANY losses!?!?!?! Arg.

I don't make $150k, so I'm not positive, but as your adjusted income reaches and exceeds $150k, your losses are minimized or eliminated. However, you may be able to carry losses forward. Dunno if that is any consolation.

Hmmmmmm......but can't I buy all sorts of 'materials' and perhaps even a vehicle, to ensure that I don't make a profit. If I buy truck that is only used for property managment (and pulling my boat trailer *AHEM* ), can't I write off the payments?

You still have to pay $1 for those materials to get a deduction of 10-50 cents. Send me $50000 and I'll send you a cashier's check for $25k. No bets required, and you don't have to send your check to Lubemaster or Cool-chick. Your vehicle can be expensed, but only to the extent it is used for business (rental property) purposes. If you drive 15k miles in one year, and only 1000 miles is for your rentals, then you may only deduct 1000 miles. Same applies if you depreciate the vehicle, instead.

What about interest form the additional mortagages. I know its only a percentage, but I can write that off to, correct?

Mortgage interest, depreciation, property taxes, insurance, maintenance expenses, management expenses, advertising, hired labor, and materials, etc are all deductible, but if you buy quality properties, these deductions will be offset by rental income. In the end, you may only see a paper loss of a few thousand dollars per year. For example, on a $125k rental property @ $1250/month rent, your Schedule E might show a loss of perhaps $3000-6000.

As I said before, RE investing is best when considered over the long term. Over time, those rentals will be free and clear and will be throwing off rental incomes. Rental income is exempt from SS/Medicare. Additionally, over the long-term, RE (values and rents) adjusts for inflation. Then, you quit or reduce your hours and enjoy life.