Newbie Investor Questions (Taxes/LLC)

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Newbie Investor Questions (Taxes/LLC)

David Yee
Member since 2021 · 9 posts · 8 votes

Hi Everyone, 

My friend and I purchased our first investment property in July.  It's a 4 unit in Ohio (we are both in CA).  I was wondering if a few savvy investors could help assist me with a few things.


1 - Cost Segregation - The property is only 125k.  I'm wondering if cost segregation is worthwhile.  I was going to get a quote and seeing how much it costs.  Has anyone had any experience w/ this service?  

2 - LLC Ownership - I wanted to purchase the property directly from the LLC but it wasn't feasible at the time. I was told this wasn't a big issue. However, I learned that if I transfer the property I could trigger a due on sale clause in my loan. I know I can bypass this with an asset protection trust but I really want the LLC protection. What is the optimal way around this?

3 - We had a difficult tenant who owes us a good amount of money.  The tenant is gone now and the odds of them paying the money owed is very very low.  I know I'm getting like 8% of the money owed but I'd like to sell the debt to get something.  Anyone have experience doing something like this?

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Paul MoorePro Member
Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
4y

@David Yee. There are three levels of cost segregation studies. A very expensive engineering-based study would obviously not be worth it. These are for commercial properties. There is a less expensive study that might be around $5000 and that would certainly not be worth it either. My understanding is that there is a very inexpensive study that can be done rather easily for well under $1000. You should certainly speak with a CPA who knows real estate to find out if it would be worth it for you to carry forward those passive losses. I recommend getting a CPA who is also a real estate tax strategist. I know one in Columbus Ohio if you want to PM me. Good luck!

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  • Joseph Cornwell
    Real Estate Agent · Cincinnati, OH · Member since 2015 · 474 posts · 580 votes
    4y

    @David Yee I would suggest you talk to a CPA about the cost segregation questions, I have a great real estate focused CPA here in Cincinnati if you need a referral, not sure what area of Ohio you are in. I am sure there are numerous variables that go into determining if the cost seg is worth the cost or not. I believe there are limitations on real estate losses if you are not designated as a real estate professional, again a CPA should know those exact answers based on your situation. I will likely do one this tax year because my business income was very high and I need additional write offs, I acquired a 4plex for 190k that I will likely use this year for the cost seg, so I have been researching this and planning with my CPA. 

    As for LLC Ownership, this will be very dependent on the lender, from my understanding most lenders do not care or even notice as long as you continue paying the mortgage. If they did call the note due based on the title transfer, you could always refinance, so it would seem your risk is minimal right now. You could also reach out to the lender and see if this will cause any issues.

    For the last question I am confused, are you referring to a debt collector? I have not used this service and I guess it would depending on the amount owed and how bad the situation is, in my experience if a tenant moves out I try to just get the unit re-leased asap and I have not wasted any time going after them for funds owed, but again this would be situational, if it is a huge amount of money it might be worth the time and effort. 

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  • Account Closed
    Accountant · San Angelo, TX · Member since 2021 · 48 posts · 80 votes
    4y

    Anyone can do a cost seg study, but you may be limited on the losses you can claim currently on your return. I'd talk to your tax pro about if it makes sense for your situation. $125k is borderline on if I would run tax savings numbers on it for a client, but it would depend on several other factors. It has to make sense or else I won't recommend it.

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  • David Yee
    OP
    Member since 2021 · 9 posts · 8 votes
    4y

    @Joseph Cornwell thank you for your response!  I'm sorry if I'm a little unclear - this is really new to me so I'm a little unsure of the proper terminology.  

    Cost Segregation - I think I misunderstood the concept of Cost Segregation.  I did a little more research and unless I'm a real estate professional (I'm not) I will only be able to offset passive gains with cost segregation so it won't be much use until I get more cash flow.  

    LLC Ownership - My lender said that his company has never called in a loan but my concern is a few years down the road my loan will look a lot better as interest rates are much higher. At that point, it would make sense for the bank to call my loan so I would have to pay a few K to refinance into a loan that has a much higher interest rate. I'll talk to my lender and an Akron lawyer for my LLC to see what I can do.


    Selling Debt - There was a tenant who has roughly 3k in rent debt.  I don't want to hire an agency to try to collect on the debt, I was thinking I could just try to sell the debt to someone else to try to collect.  I don't expect I'd receive much but I figure it wouldn't take that long and I could make 5-10% back on the bad debt.  

    Thank you so much for your response!  

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  • Joseph Cornwell
    Real Estate Agent · Cincinnati, OH · Member since 2015 · 474 posts · 580 votes
    4y

    @David Yee Oh, I have never heard of anyone buying bad tenant debt. If you are able to find someone to buy it, let me know, that is an interesting concept. However, for me personally I would just move on and put that energy into creating more income and finding another deal! Good luck! 

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    4y

    @David Yee

    You mention that you acquired the property with a friend. Did you acquire the property as tenants in common? 
    It appears from 'point 2 - LLC ownership' that you are on title. However, is your friend on title?

    You should talk to a CPA whether you should perform a cost segregation study, It may or may not help.
    Furthermore, if the property is purchased with a friend, in reality, you can think of it that your share is split, so its really a $62,500 purchase(for tax basis purposes).

    Best of luck

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  • Paul MoorePro Member
    Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
    4y

    @David Yee. There are three levels of cost segregation studies. A very expensive engineering-based study would obviously not be worth it. These are for commercial properties. There is a less expensive study that might be around $5000 and that would certainly not be worth it either. My understanding is that there is a very inexpensive study that can be done rather easily for well under $1000. You should certainly speak with a CPA who knows real estate to find out if it would be worth it for you to carry forward those passive losses. I recommend getting a CPA who is also a real estate tax strategist. I know one in Columbus Ohio if you want to PM me. Good luck!

    Podcast Guest on Show #533
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  • Cameron Braig
    Atlanta, GA · Member since 2021 · 493 posts · 162 votes
    4y

    @David Yee

    Thanks for sharing, found the post helpful as well. 

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