All Forum Posts by: Alan Rohrer

@John-David Herlihy

The new tax law definitely made this something to think about- as before it was pretty clear to avoid a C-Corp... now it's not as easy to rule out. Because of this, it's important to look at long term goals in the business, as well as your current practices, then run the numbers. Talking about theoretical pros/cons doesn't help as much as running the numbers on a few scenarios, so be sure to talk about this at your next (monthly or quarterly) tax-planning call with your CPA.

Here are some thoughts:

1) If you just take a normal salary and keep the rest of the money in your business to generate active income (vs passive), then a C-Corp can have its advantages because of the low tax rate. If you aren't taking much out, then the drawback of double taxation won't have as big of an effect. There's no way to know on this unless you run the actual numbers.

2) If you are planning to sell in the future, an asset-sale of a C-Corp (as it is usually structured) would result in a tax to the C-Corp on the sale of assets, and additional tax on the distribution to shareholders. Once again, if this may sell for a significant amount, it's something to discuss with your CPA.

3) You lose the pass through losses with a C-Corp. However, this may not be a big drawback, because if you are doing well in a flipping business, you likely wouldn't have losses like you would if you were taking depreciation on rentals.

4) Depending on the state and local tax liabilities- individuals can only deduct the 1st $10,000. C-Corps are not limited, so there may be an advantage here. However, a negative in relation to state taxes is that if you are distributing dividends from a C-Corp, states typically don't tax this at a different rate than ordinary income.

I will say that IN GENERAL, I would still stick to a pass-through entity. However, if there's one thing I want everyone to take from the question/response - it's that you need to run the numbers with your CPA that knows your entire business and future goals.

Hope this helps!

@Mark Hughes

You have a few options when it comes to both health insurance and retirement. 

Health Insurance: If the S-Corp pays health insurance for employees, the cost is deductible for the S-Corp. However, if any of the employees are greater than 2% shareholders, the health insurance premiums are included on their W-2 as compensation. 

This compensation would fortunately not be subjected to SS or Medicare taxes, which is a plus- as long as you have health plan available in your company (doesn't have to be available to all employees- as long as it's available to a certain class). You can also deduct this compensation to you as self-employed health insurance on your 1040.

If you were a member of an LLC (owned your own, or had a few partners), you would be considered self-employed. In this circumstance, if you directly pay your own health insurance premiums, you can take a deduction on the 1st page of the 1040 for "self employed health insurance". However- you mentioned you would be flipping, so you would lose the benefits of an S-Corp if this is the way you end up going.

Finally- I don't know how NM is with this, but in Indiana, the health insurance options for a 1 person company are a joke. You're pretty much limited to what's on the exchange. However, the second you have at least 2 individuals who will be on the plan, you can get great options through industry groups. I'd also keep this in mind.

For health insurance- I'd recommend having a chat with your accountant who can help you compare actual numbers and benefits vs. the theoretical which we are talking about here.

Retirement Plans: This is a much smaller hurdle to jump over. Go to Vanguard, Fidelity, etc and you'll find a number of options for self-employed individuals. You can get a solo 401K if you're a solo proprietor or partner with no employees. Once you have employees, you can do small plan 401Ks as well. Many of the big companies I mentioned will help you with this- so once again, the retirement plans aren't a big hurdle.

Feel free to reach out if you have any additional questions!

@Kim Grennan

You've come to the right place! I'd recommend searching for a CPA here on BiggerPockets. Many work with clients remotely, as location doesn't seem to matter as much these days. 

What does matter (as you pointed out) is finding someone who is an expert in real estate, who can help you create a tax strategy alongside your self-employed business. I'd prioritize finding someone like that over someone in your specific geographic area.

Hope this helps- and feel free to reach out if you have any questions!

@Lauren Keen Aumond

If they are not opposed to staying in the real estate game, and they have interest in partnering with you, you definitely have some options.

The first thought may be to do a 1031 exchange. However, they can't sell a property they own 100% and 1031 into a partnership they don't fully own that purchases a property. 

One option if they want to go in on a property with you would be to 1031 into a Tenant In Common (TIC) arrangement with you. This is where 2 parties own an undivided interest in a property. Translation: "you would both own a certain percentage of the WHOLE property. You couldn't split it up where you owned the house, and your parents owned the land... you own an agreed upon percentage of everything."

@Dave Foster may be able to elaborate on this, as I admit I'm a bit rusty on this strategy.

This may be a good way to partner with you and avoid taxes. I believe a TIC can then be passed down to heirs (you) when they pass away.

An installment sale, seller financing, and many other sale methods will likely result in paying taxes on their end (it would just be spread out over a number of years).

And having them sell it to you at a low purchase price (to avoid taxes on their end) would decrease the amount of depreciation you would be able to take... which would increase taxes on your end.

Also, taxes are not necessarily something to always avoid at all costs. There may be situations where incurring taxes as a result of moving their money into an asset class that better fits their goals isn't a bad decision. You just need to run the numbers.

Because of this, I'd recommend chatting with a RE CPA that has a full picture of you and your parent's financial situation.

Hope this helps!

@Marvin Lee

I don't know of many dual licensed CPAs and Attorneys on here that specialize only in real estate. However, there are plenty of CPAs OR Attorneys on BiggerPockets that work with clients remotely.

I'd recommend looking for someone with expertise in RE as a first priority, as location doesn't seem to matter much these days.

The one that comes to the top of my mind is Mark Kohler. He is a CPA and Attorney that runs a nationwide firm. He works with multiple industries I believe, but has experience in RE.

Hope this helps!

@Dani Borow - You'll learn far more by spending 50k on purchasing homes/flipping than you would by spending it on education. Just spend your time here, ask all the questions you need, and read through some of the guides BP has published.

You'll learn WAY more, it's free, and you can use your money to actually purchase homes.

Good luck!

@Rob Cucugliello

You are definitely on the right track- and the fact that you're thinking of getting organized BEFORE you grow is good move.

A few answers, and then a few recommendations:

1) If you own rentals, it's pretty important to have an LLC as protection. I've seen/heard of too many cases where someone gets injured in a rental and then goes after the owner's personal assets.

2) Part of making the LLC legitimate is to make sure both on paper and in practice- that it is separate from you. Running everything through a personal bank account is one of the easier ways for a lawyer to argue that the LLC isn't really operating as a separate entity... then they can come after you.

A small business bank account would be a good way to go- after you create the LLC.

Other than the need of a separate account to make the LLC legitimate, it also will help you stay organized.

3) It's important not to hold rental properties in an S-Corp because it can cause problems in the future if trying to transfer properties... plus- because rental income isn't subjected to SS taxes, there wouldn't be a benefit. However, if you are also going to flip houses, then you should look into running that income through an S-Corp via another entity.

Recommendation: Being your size right now and in order to prepare yourself for growth, I'd try to have the following things in place:

- An LLC with a separate bank account

- A system where you document all receipts for your expenses, including mileage

- A simple spreadsheet or basic accounting system that helps you allocate expenses and income by property

- A process where you reconcile your bank statement at least quarterly to make sure you aren't missing any expenses

There may be something I'm missing because I don't know your whole situation, so please talk to your accountant or attorney before you act on any of the things I said above!

@Chris Patao

As a CPA myself, hopefully I can offer some insight.

If your goal is to go into public accounting at a large or midsize firm, just know that your masters will not actually fetch a higher pay. 

Also it probably won't help with the CPA exam... studying for the CPA exam with a good prep course is what helps with the CPA exam.

I fulfilled my education requirements in undergrad just taking additional classes to get to my 150 hours. When I started at a large public firm, those who had their masters were not any better or worse at the job (and we all got paid the same).

If you're close to the 150, I would just take a few extra business-related classes and avoid the tuition of a masters/MBA.

If I wasn't close to the requirement and had to pursue an advanced degree, I would do the MBA 100% no questions asked (if the prices are similar). The thing about accounting education is that it seems to be closer to a trade school- (not that there's anything wrong with that) in that you learn the correct and incorrect ways to do things (like how to account for transactions).

In the business world, there are few instances where there are correct or incorrect ways to do things. It's way more beneficial to get experience in a concentration that builds on higher level thinking.

In undergrad, I also got a major in Finance and minor in psych. Finance, especially at the 300 level+ is very beneficial with higher level thinking, and I'm incredibly thankful I got that experience.

In summary- in the public accounting field, the MBA or MSA title does not impact anything... pay/promotion track/skill/etc. Having the CPA determines everything.

In the general business field, an MBA will will hold more weight than an MSA for sure. However, it probably won't impact your career path vs just having a CPA until you're trying for upper level management.

Because of these reasons, that's why I generally recommend staying away from the MSA and either doing extra classes or doing an MBA (in that order of priority).

Feel free to message me if you have any specific questions!

@Soomin Kim

I'll let @Andrew Kerr talk you through the details of a cash out refinance.

As far as depreciation- on the day you convert to a rental, the depreciation is the LOWER of:

1) The Fair Market Value of the property (it's value on the market)

2) Your adjusted basis in the property (basically what you paid for it + improvements + original closing costs). This is the item I suggested getting a tax preparer for.

The increase in property value after you convert to a rental will not impact depreciation, as depreciation is determined by "basis" which doesn't fluctuate with property values.

@Soomin Kim

"Mortgage Expense" as you are referring to is broken up into 2 parts: principal and interest. Because the principal payments are actually just paying back money you borrowed, the IRS doesn't see this as an expense.

However, the "interest" portion of your mortgage is a deductible expense on a rental.

Other than mortgage interest, there are plenty of expenses to offset income. For instance:

1) HOA Fees

2) Insurance on the property

3) Mileage on trips to the property

4) Repairs

5) Property Taxes

6) Depreciation

As far as depreciation, I'd recommend getting someone with real estate experience to prepare your taxes the first year after you convert your property into a rental. The reason is because depreciation is based on the basis (value) of the property. Determining the basis, which may include improvements, among other items, will impact your depreciation expense for years, so it's important to get right the first time.

Hope this helps!