Asset Protection, Financial and Tax Guidance

[Ram Peruml]

Hello,

I own 2 rental properties in Northern Virginia. Our house hold income is above 295K. I would like to get guidance to protect these assets and future rental properties (buy and hold) as well as get a break from tax.

Would it make sense the follow the below strategy for asset protection and tax benefits? I maybe using wrong terms, please excuse.

Full Disclaimer, I have been watching too many youtube videos and biggerpocket podcasts to come up with the below plan.

1. Create a Wyoming scorp under my name

2. Deed the properties to land trust (one each). Each Land Trust to be unique name not tied to our personal details or address.

3. Create one Virginia LLC per property and assign as the trustee for the respective Land Trusts. Each LLC is owned by Wyoming scorp

4. Create another Virginia LLC for property management owned by Wyoming scorp.

5. Execute lease agreement between property management LLC and virginia LLCs

6. Execute rental agreement between property management LLC and tenants

7. Start paying mortgage from Wyoming scorp derived from the rent.

8. Purchase umbrella policy under Wyoming scorp to cover both properties

9. The residue at the end of the year gets passed to Wyoming scorp which reflects as K1 in my W2.

The below are the current challenges that I am trying to achieve by the above steps:

1. Asset protection (naturally)

2. As of now, the entire rental income is reflecting in my W2. In practice, I am sending all the rental income to mortgage and other expenses. End of the year, I may end up getting 2K total from both properties. This is putting me in the highest tax bracket possible. By using property management LLC for maintenance and using scorp to pay mortgage, I may get just 2K additional income from these properties. This saves me lots of tax by lowering my tax bracket

3. In the future, as I buy additional rental properties (buy and hold), I will have to follow steps 2,3,5,6 & 7.

Question:

1. Can someone (everyone) glance at the above strategy and find any glaring mistakes?

2. Can you recommend any reputable asset protection and taxation services partner?

I am hoping to get this done before the end of the year so I start next year as clean slate.

Thank you reading the long post and appreciate all your input.

[Costin I.]

@Ram Peruml Here is some unqualified advice - talk with a specialist like @Scott Smith for professional legal advice.

1. It might not be a wise idea to own real estate in a S-corp or C-corp (https://www.biggerpockets.com/renewsblog/2016/02/25/owning-rentals-s-corporation/) and I'm not sure how putting the S-corp at the top is going to affect the ownership of the LLC and further of the properties. You can make for sure the shell entity (the one not owning any assets) an S-corp.

2. If you plan on using a quit-claim deed for the transfer, double check on the transfer of title insurance (you might lose it). Use a warranty deed is better. Whether title insurance terminates by transferring real property depends on the type of policy, and how “insured” is defined in the policy. You take a risk which could result in cancellation of your title insurance and complete loss of your real property without compensation in the event that a title issue regarding your real property arises. Contact your title insurance company to determine coverage and if your policy does cover transfers , and when or how.

3. See if a Series-LLC is an option for you. Might work better than having to create and maintain an LLC per property. Talk with @Scott Smith.

4. Sounds good.

5. Sounds good.

6. Sounds good.

7. See #1. Mortgage could be paid from the management company or asset holding entity.

8. I think insurance needs to have owner (the asset holding entity) and trust (as additional insured), not the top holder. Speak with @Jason Bott for expert advice on insurance.

9. If you pass your income through the Wyoming S-corp, it might be considered active income and you’ll have to pay self-employment taxes on that income, losing the whole idea of rentals generating passive income. Check with @Nicholas Aiola on tax considerations.

10. You can have the Property Management Shell LLC charge property management fees and establish Solo 401K plans based on that generated income. You will have to pay self-employment tax on that income though. But it would also allow you to rollover other IRA funds and invest them in other RE or lending.

11. I don’t see how any of these legal structures will allow you to save from taxes or lower your tax bracket. You might be able to get the 20% business deduction from your rental income if you log and document properly 250 hours of activity in your rentals. If you have losses (and you might lower your rental income using depreciation, and/or accelerating that depreciation by doing cost segregation study on your properties), you might be able to use them to deduct up to 25K from your active side if your AGI is under 100K, prorated to 150K. Since it’s above that, you might be able to deduct it if you (or your wife) qualify as a real estate professional (log and document properly 750 hours of activity in your RE/rental business and this is your primary source of income).

Here are some diagrams to help you on your quest:

Asset-protection-onion-diagram-v2

Asset-protection-decision-diagram

Asset-protection-structures