What am I doing wrong? (tax questions)

[Paul Choate]

Warning- This is long-

I just got my taxes back for last year and I am really confused. I have tried to grow my rental business a bit too rapidly and I am trying to figure out how to level this out so it works for my family.

I have used a couple of different CPAs and I am not comfortable with what they are doing. (BTW I am an attorney but I am clueless on taxes.) I thought I would go to the collective knowledge here to see where I am off track.

In 2011, I showed a loss on my rentals because I had just fixed up most of them and I did not take in much income because they were down for most of the year. I have been investing from my law practice into my rentals for years but this was a big loss for me ($20,000). Fun fact- If you apply for a loan after showing this loss, a bank won't care that you spent the money on income producing assets. I would have been better off going to Vegas and flushing the money down a toilet and then they would have given me a loan!

Flash forward to 2012 taxes, now I have my same legal income and this time because I had bought and sold a few properties, retained/ fixed up a couple more, my new accountant wants me to capitalize the improvements, I am showing double the income from the year before and paying 3x the taxes. Now I am going to take it in the teeth for the new healthcare requirements because I will not qualify for any subsidies etc...(not a political statement- its the law, I am just trying to deal with it).

Here is my main question. I paid the same amount of money to myself in both years. What I take home is not changing. I understand capitalization and depreciation but try explaining to your wife why real estate is such a good deal when you can't borrow money because of it and your tax bill is not dependent on what you take home at the end of the day. What am I doing wrong?

If it helps, my units cost about $18,000 and rent for an average of $500 per month. I have put most of everything I get out of them back into them to pay for the upgrades and any financing I do is paid back in about a year to 3 years by taking the money from the paid for properties to pay off the others. I bought my first one in 2006 and I now have 13. Is this just because I am growing or is this how it is down the line?

Also, this year I started a partnership with an investor. He loans the money to an LLC we jointly own. The LLC gives him back a mortgage which is amortized out over 5 years. Basically all of the income is going to pay off the properties and cover expenses. I wont make any thing for 5 years. We bought 2 since August and should have a couple more buy and holds this year. Am I going to be nailed again next year?

One last set of questions- We are also set to close on a couple of flips this month through the joint LLC. If I retain the profits from the sales of the flips in the LLC and purchase more properties will I get individually taxed on that? Is it better to distribute the money each time we sale a property to the members?

Thanks for any help.