Ethics (not morals) and Loopholes. Which ones have you used and why?

Question

With all the creative R/E investors here on BP lets chat and share about the loopholes you have used. Maybe loopholes is considered "taboo" to some so lets call them rules that seem to "favor" those educated (My new favorite word) in real estate investing to gain and maintain wealth. Try not to get to technical and explain the reason you used them (the loopholes ummm the rules that is). NOT TO BE CONSTRUED AS LEGAL OR ACCOUNTING ADVICE.... Ugh lawyers

1- I shall start... 1031 exchanges - I was able to defer/eliminate/suppress profits I gained on a property sale of one property to purchase additional passive income properties. (went from one property to 3 and paid not cap gain taxes)

2- Create LLC's to Protect my properties. If I am sued for an issue at one property (slip and fall) as long as I follow the rules of an LLC the claimant would have a very difficult time attaching any compensation award against me or my other properties.

3- Found properties that were being used as residential use properties only in a commercial/mixed use zone (per the dusty zoning map at the townships office) and converted them all to mixed use. It afforded me two streams of income one from the business at the location and one from the residential tenant. Also a huge plus some tenants are employees of the businesses (to fit the rules need to create some professional use mixed use rules) and some businesses I even own. Now the locations even offer signage of my REI business and others as well as well. Some properties went from on revenue stream to 4 different ones...

4- I use the business of REI and created an LLC to defer some of the profits through to family members to help pay for their college as they are "employees" of my REI business and I can deduct (pay for their college) As i can use about 5k a year as education expenses.

5- Since my siblings are employees of my businesses and are in sales and marketing for the business they use a wrapped (lettered in advertisement) company vehicle going back and forth to school and other business related venues. Kills to birds with one stone. Provides them a way to get back and forth to school and advertises the business while driving and heading to venues that are company related. Side note: Oh and lets me know where my siblings are as we get calls often from people saying "I saw your marketed vehicle at such and such PARTY" which happens to be the BOYFRIENDS home you want her to keep away from... Instead of the Small business seminar they were supposed to be attending. LOL but true!

ANYONE ELSE!

Account Closed · Answer

@James S.

I would suggest going to your local SBDC (small business development center) an arm of your SBA. Most counties in the USA have one. Yours I believe is in Tacoma. Tell them you want to start a business in real estate investing. They should suggest classes on being an entrepreneur (they cost about 35-55 per class subject course in my area). In NJ they offer a 3- 4 month long "entrepreneurial certificate program". The best $225.00 I ever spent on anything to do with business to which you get a certificate after you complete it (banks/lenders love to see them in business plans i know as because of it i received a number of start up loans) . This is a summary of business topics they cover AND IT IS REAL WORLD STUFF. The courses and workshops familiarize entrepreneurs and small business owners with business plans, legal issues, marketing strategies, financial statements, small business taxes, and small business record-keeping systems.

In that program one of the things they teach you is about different structures (llc's, s corps, c corps and etc) and usually bring in an expert whom you can ask a ton of questions to and he or she usually can help you set one up or suggest an attorney whom does (Usually on the cheap). If you do not want to take the whole program they offer just individual classes on things like starting a business 101... But in my honest opinion for the very minimal cost for the whole program any true REI er should take the classes.... The program again is very real world but the instructors are very reachable and touchable on the topics they teach. Most have a passion to teach share and get want you to succeed.

Hope that helps......

Account Closed · Answer

In addition to what you stated above, here are some others:

- Depreciation against rental incomes.

- Cash-out refinance allows you walk away with tax-free money.

- Owning a business allows you to write-off your cell phone, supplies, dining, mileage, car/truck, umbrella insurance, your CPA fee.

- Your vacations and related expenses can be tax deductible too.

- Your BP membership can be tax deductible too.

Linda Weygant · Answer

Some of this is deductible as an expense, some of it should be considered as basis in your next property.

For example, the following are expenses of your **current** business and can be written off against your current rental income.

Cell Phone and Internet (some people only write off parts of these depending on volume of use, etc)

Office Supplies (paper, envelopes, stamps, pens, pencils, etc)

Mileage for self management of properties

Travel expenses for you to go check on your properties

Umbrella Insurance for current properties

CPA fees for bookkeeping and preparing taxes

Legal fees for ongoing business such as leases and evictions.

BP membership if you're using it for research on how to manage your **current** properties, such as tenant/landlord issues, DYI repairs and stuff like that.

Unless you are a real estate professional, any expenses incurred to find your **next** property are NOT deductible as incurred and are instead added as depreciating basis to the **next** property you purchase. This includes:

Travel Expenses (airfare, hotel, car rental expenses) for trips in which you are researching or looking at property to purchase. If your spouse is generally involved in decision making for this, then your spouse's expenses are also included. Do not include travel expenses, extra hotel rooms, etc for your children, your children's nanny or other relatives, unless they are also involved in your real estate decision making. Do not include Disneyland tickets, parasailing and snorkeling activities, etc. (Yes, I had a client want to do this once). When you want to include travel expenses, make sure that you can substantiate this trip such as having a list of properties that you visited, the name of a real estate agent you spoke with (if appropriate) and any analysis work you did on the properties. In the event you decide not to buy in that area, but still want to depreciate this later, you should be able to document this. Lots of people go to Hawaii and other exotic destinations to "research real estate investment". When the IRS questions it, they can't seem to come up with one single address they even drove by.

Your mileage for driving around town to visit properties.

Fees to join sites such as loopnet. Fees for BP if you are using it solely to advertise to get your next deal. (Intent is key here, not just the fact that you have the membership).

Earnest money that is lost due to backing out of contracts is rolled into the basis of the next property.

Inspections and appraisals for properties you ended up not purchasing are rolled into the basis of the next property.

CPA / legal fees for advise or analysis on the next property.

probably a whole lot of others I'm not thinking of right now.

Wrapped vehicles (for advertising) is a VERY grey area with the IRS. Magnetic signs on a vehicle are even greyer. The IRS does not necessarily agree that advertising on a vehicle means that every mile driven is a business mile.

Antonio Pantano · Answer

Wally sounds like you know what your doing... The LLC's are owned by a small business S-Corp, or another LLC. and income the employee saleries are paid by the company?

I'm thinking without asking an attorney this is the right way to set it up. I'm new at REI, but have owned businesses before. We used an S-corp to have some type of protection.

Just wondering your thoughts

Thanks

Anthony

Andrey Y. · Answer

This is only if qualified as "real estate professional", correct me if I am wrong.

Account Closed · Answer

Bill Gulley

You need to meet the intent and the justification isn't so much as making a claim as not being guilty of violating a few letters, but being able to show that what you do is not violating the intent of the rules. Tax avoidance is fine, tax evasion you go to jail for.

The above statement is one many should pay attention to...

I'm sure everyone thinks that I'm Suzy Straight Lace, Mr. Rules and Regulations.......well, I am, to the extent of understanding how to stay out of trouble. I don't see "loopholes" I see areas of law or rules or regulations that leave the door open that allow room to maneuver. 1. Is it ethical and 2. is it meeting my moral compass and 3. Is it legal

Wow "room to maneuver" I like that one... I will try to forever use those words in place of "loophole" in my future conversations ... Thanks Bill G.

As to the OP, I don't really buy the loophole definition or the stab at it, thing is there really aren't repetitious operations or tricks used long term to build wealth or advance yourself.

Repetitious operations are one thing I pride myself on... Doing 1031 exchanges over and over has built my wealth tremendously... That said it is always done in accordance to the letter of the law (to the best it can be interpreted by my professional consultants) and under the guidance of my Tax attorney, CPA and other advisors I use for both short and long term goals

Everyone needs to understand that there are enough laws out there to nail anyone if the powers to be want you nailed, there really isn't some unique law or regulation that will be avoided the same way for multiple operators, your case will always be different.

Lastly, Unfortunately I am not an expert in many things. I use trusted professionals that hopefully have the same interpretations of ethical, moral and legal as I... Even legal can be ambiguous as if it weren't we would not have an appellate division in the court system. I am not suggesting in any way that anyone do things that might increase their chance of going to jail. That said life is full of risks and rewards. In my opinion...as a REI those choices are that of the REI to assess and make...

All the best and I truly appreciate your post Bill G.

Wally

Bill Gulley · Answer

If you are going to be in business, any kind of business, including the RE business, you should understand business, take business classes, go to the SBA, go business tax seminars, business clubs in your community will have business leaders and others that can advise in many areas that will only broaden your abilities to operate in your business.

As to the OP, I don't really buy the loophole definition or the stab at it, thing is there really aren't repetitious operations or tricks used long term to build wealth or advance yourself.

Okay, some people simply have no morals, I get that, they also can't understand ethical matters unless there is a dollar in it for them, I get that too. Takes all kinds to make the world go around.

I'm sure everyone thinks that I'm Suzy Straight Lace, Mr. Rules and Regulations.......well, I am, to the extent of understanding how to stay out of trouble. I don't see "loopholes" I see areas of law or rules or regulations that leave the door open that allow room to maneuver. 1. Is it ethical and 2. is it meeting my moral compass and 3. Is it legal?

Most here seem to read the laws and take each letter literally and apply it to what they want to do, then look for justifications to avoid that road block. The "loophole seekers". Problem is they aren't getting the "INTENT" of the law or regulation which is just as important.

You need to meet the intent and the justification isn't so much as making a claim as not being guilty of violating a few letters, but being able to show that what you do is not violating the intent of the rules. Tax avoidance is fine, tax evasion you go to jail for.

I know accounting pretty well, probably better than most IRS employees, so if or when I have an accounting issue that becomes a tax matter, I can justify my accounting within the rules, problem solved. I don't cheat on my taxes. Now, can you really show you don't use your cell phone mostly for personal use? If you can, write it off.

Everyone needs to understand that there are enough laws out there to nail anyone if the powers to be want you nailed, there really isn't some unique law or regulation that will be avoided the same way for multiple operators, your case will always be different.

Walking a thin line is a risk assessment, the parties involved, the intent of the parties, their financial position, and experience, what is customary in your area, political views and opinions of your local courts, the degree of a violation, the public harm at risk, if any losses were suffered and other implications of you following some loophole. One of the biggest considerations is the frequency of violations. This is what your attorney is for, they can assist you in that risk and reward assessment.

There are however, more serious risks, rules not to be violated, risks that may arise that clearly outweigh the benefits. These are what I talk about here most often, if something can lead you down a path where you can lose your investment, like screwing up writing your own contract or notes, or trying to CYA in documents to use a loophole, that is something where most may not see far enough down the road to make a decent determination about.

An example, using a RMLO on a residential owner occupied deal. I may sell a property and carry the note myself, it's with a neighbor (a couple, a detective and an IRS agent) okay, what's the risk (slim and none for me as they are asking for the deal). I can also count it as my second home, I'm exempt from Dodd-Frank as they simply want the property to be joined to their existing properties. I'm also going to underwrite it and document the borrowers, there is nothing an RMLO can do on it that I can't, I can prove the experience even though I don't meet the letter of the law. What is the risk that some regulator will go after my deal? I'd say slim and none. Let's say too, that I write it up that if any part of the deal is found to be in violation, the security agreement shall become invalid, released and set off automatically to some other collateral which makes Dodd-Frank irrelevant (just thinking out loud here) how can that be any harm or foul? It's not. Is that a "loophole" ? It might be, I call it being in compliance and if in error being corrected on the spot!

So, in order to use some loophole, you need to be aware of the intent, what the law says, why it is there, ensure there is no harm or foul, isn't predatory and that you can exit from that situation quickly in the event any issue does arise.

Your loopholes will be something that pops up based on circumstances, not so much as a way to operate and conduct your business, doing things over and over will just earn you a reputation of being shady. Your risks of getting nailed go up when you have a shady reputation. So, your main focus is to operate in compliance. There will be times when 100% compliance can't be met, it will happen, that is when ethics and your morale compass should kick in, your attorney should advise, the risk be assessed and then decide what the cost-benefit might be. Everyone in business will be in such a situation at some point without looking for "loopholes". Good luck :)

Anthony Uva · Answer

Good info.

Thank you Wally, thank you BP, thank you SBA!

Antonio Pantano · Answer

Wow Awesome info from everyone. It a great starting point. Wally thanks for sharing all your insight on the topic. I'm going to check out the certification here in new jersey. Should help. I have an understanding but I think I may need it to be drilled into my head. Having experts available to you can certainly get you on the right track.

Thanks again Anthony

Account Closed · Answer

Send me a message about what you are seeking in a mentor.... I suggest BP can help better than I because of Logistics

Ethics (not morals) and Loopholes. Which ones have you used and why?

Ethics (not morals) and Loopholes. Which ones have you used and why?

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