What are your most helpful tax strategies? Can I create a business to self manage?

Question

I have 8 doors that are investments. I have children and a fulltime job. I would like to find tax strategies to reduce my taxable income. All houses right now are mortgaged through my name/social, but deeded over to real estate trusts. My tax accountant files them as investment properties under my social. I would like to accomplish the following:

1. I am looking into purchasing more properties, and want to have some kind of Holdings Co where the taxable income flows through so I can tax advantage of the corporate tax rate.

2. I self manage 6 of the 8 doors. Can I pay the management company I set up a mgmt fee? Do I have to pay an employee a mgmt fee (myself?) or, can I just pay the company and keep the income in the company and then pay the shareholders (me), dividends, or the owners (me) distributions?

3. I would like to set up the holdings company to have multiple businesses within... an investment company so I can own the properties under the investment company and a management company so I can earn mgmt fees.

Is this something that anyone has done and is it possible? What are some strategies you use?

Tanner Bellamy · Answer

Hi @Selina Giarla,

Wow a lot going on here. With that many properties, a holding company might be an advantage for you. Not necessarily for tax purposes, but for asset protection purposes. You do not want your rental properties taxed at a corporate rate.

You probably want to keep the management company separate from the rental properties. Generally, you want to keep passive and non-passive separate. The management company would be considered a non-passive business.

There are a lot of tax professionals specializing in real estate that can help you that are active in this forum. I would reach out to one and see if they can help you. I would venture to say that a few hundred dollars for some advice could save you thousands.

James Mc Ree · Answer

My initial impression is you are making this way more complicated than it should be and none of the complexity gives you a tax benefit. Complexity = overhead, time, cost and risk. You have a small business. Try to keep complexity and expenses low for your small business or you will spend a lot of time and cash feeding the monster. Your description reads like you are creating a dozen variations of you. It might be different if others were involved.

Consider an umbrella insurance policy instead of the web of LLCs and corps. The insurance policy is likely to provide you with far more protection.

Be careful you don't create a self-dealing situation with you and your management company, which is really you. The IRS doesn't allow tax breaks for self-dealing and I don't see how you would benefit.

For example, rent comes to you for $1,000. You pay your bills and end up with X cash flow. Alternatively, you transfer the $1,000 rent to mgt company which records it as revenue, just like you would. The company pays bills, just like you, and ends up with the same X profit.

If the company is a pass-through LLC, then it just flows right through to you as income as if you and the LLC are one, which you are in the eyes of the IRS, and you have no tax benefit for the LLC.

Alternatively, if it is truly a separate company, the company pays tax on the income and you pay tax on distributions from the company. It's double taxation. The company also pays employment taxes, fees, etc most of which you would not pay as an individual.

I have 13 rentals and a little over $250,000 in annual revenue. It's also a small business. I manage them all myself as me. Each are separately insured and covered together by an umbrella. I manage it all with linked Excel spreadsheets and do my own taxes with TurboTax.

Keep it simple and use the time and expense saved to get away from your desk and acquire more properties.

Bill B. · Answer

Condense everything said before @James Mc Ree and en capitalize it.

You aren’t going to create ANY of those companies or llcs or corporations to save taxes. Your taxes will stay the same or increase, and your tax prep will definitely increase. So you will spend more time and and money for no gain or a net loss.

You aren’t going to create them for privacy (the county tax records will make it obvious the previous owner moved them in to an LLC or trust.)

You aren’t going to create them for liability because 1) you’re going to screw up and co-mingle funds piercing the corporate veil. 2) Anything that gets the property in the LLC sued is going to be your fault, so you’ll be sued as well. 3) you’re just going to buy an umbrella policy because you are 10X more likely to get sued for something you do than something the property does. (Car crash, vendor hurt, dog bite, etc etc.) and none of owe LLC’s or corporations or holding companies will help you in those situations.

I understand. Real estate investing is really really really boring. You want to add some action, some progress, some EXCITEMENT!  This isn’t it.  james is so close to my story, i have a dozen properties with about the same income. No companies, no LLC’s, just a $4M umbrella policy. I do use a CPA but that’s because I really don’t. Want to work more than an hour a month and I believe he saves me more than he costs.

Costin I. · Answer

@Selina Giarla

• For      asset protection purposes you might want to have asset holding entities      (LLCs). Not an S-Corp (you do want to hold real estate in S-Corp). These      just hold the assets and do nothing else.
• You      should have a shell LLC for all operations and property management. This PM      LLC doesn’t hold any assets and it’s doing all the interfacing with the      public, vendors, contractors, tenants, etc.
• You      and your asset holding entities will have a property management contract with      your PM LLC – and you can charge PM fees, thus generating self-income. You      can then qualify for a Solo 401K and contribute to it a lot more than with      a regular 401K. But you’ll have to pay income taxes, so it depends on      other factors if you are really saving from taxes.
• You      can do cost segregation on your properties and generate a lot of      deductions – but if you can get advantage of those deductions and move      them from the passive side to the active side (via REPS) it’s another question      (and unlikely if you have a W2 job, maybe a stay at home significant other?).

Here are some diagrams to help you on this quest:

• Asset      Protection Decision Diagram - to help assess the need for asset      protection, and what to implement: AssPro_Decision_Diagram
• Asset      Protection Onion Diagram - what, when, and at what cost one should      implement in terms of asset protection - APOnion__Diagram
• How a      fully implemented asset protection layout might look. - Asset Protection Layout
• A CSS Decision Diagram flowchart intended to bring      together all the various questions when assessing the benefits of a Cost      Segregation Study (via a professional or DIY).

Let me know if you have questions or want to chat further - I can give you my investor perspective - text me at 512-368-9940 and we can talk further.

PS. Read this book first - https://www.amazon.com/Every-Landlords-Property-Protection-Guide/dp/1413307000 - before getting into more complicated and expensive measures of protection.

Account Closed · Answer

Hello Selina, All of these things you mentioned you can more or less do. Should you do it is a better question. Setting up a separate management company in order to save taxes is something that you would need to crunch the numbers on.

Ashish Acharya · Answer

You're on the right track with your real estate investments. Setting up holding companies and LLCs will not save you taxes but will help you manage and operate them better.

You can create a management company to handle the properties you manage and pay it a management fee. But remember that net income from the property management company will pay self-employment taxes, while rental income does not. So, be careful.  There are many tax strategies.

Structuring operations with a holdings and management company is a common strategy among real estate investors. It offers potential tax benefits and better asset protection.

Julio Gonzalez · Answer

@Selina Giarla Here are some tax incentives that you may find helpful. Feel free to reach out if you have any questions!Don't Overlook These 5 Tax Incentives! (biggerpockets.com)

Rene Hosman · Answer

I completely agree with the other answers that getting someone to help you is a good bet, having someone in your corner who understands the intricacies of the tax code rather than DIYing that should save you more money (and time) than you're paying them ever since I got my first rental I've had a pro doing my taxes but kuddos to you for being able to juggle so much for so long on your own!! https://www.biggerpockets.com/business/finder/tax-and-financ...

Great resources no matter what state to find a tax pro who specifically understands real estate.

George Taylor · Answer

I've just had a conversation yesterday with a client of mine to add cost segregation to her sax strategy. Her and her husband both have corporate full-time jobs, own several condos, manager other properties, and own their own PM company. It can be done, I'm just not able to contribute much more than that.

All I can say is since they are adding cost segregation to their tax strategy, before too much longer, they'll be able to get into their first MF investment.

Benjamin Aaker · Answer

1. Talk to an accountant about this. Since real estate for you will be treated as a passive investment, you won't be able to offset your personal income with losses. You may not find huge tax benefits by putting your properties into a corporation - Though there are risk benefits.

2. You can pay your own company a management fee. You can pay yourself distributions, which will be reported in a K1 tax form. Again, you won't be able to offset your personal income with losses here.

3. This is a great idea to help mitigate risk, but you probably won't receive tax benefits over your current strategy.

Seems like for every one of these you will need to become a real estate professional (a tax designation). You won't be able to do so with a full-time job.

What are your most helpful tax strategies? Can I create a business to self manage?

Most Popular Reply