All Forum Posts by: Brandon Hall

@Account Closed 

Can you provide more details about your wife? For instance, does she have a full-time or part-time job? Did she document the hours it took to complete the project? As a GC she can count all of the hours she spent managing the project, including personnel. 

As I am sure you know, if she can be classified as a real estate professional, all real estate losses can be used to off-set your combined ordinary income assuming you file jointly. To qualify, 51% of the personal services she performed in all trades or businesses during the tax year must be performed in real property trades or businesses in which she materially participated AND she performed more than 750 hours of services during the tax year in real property trades or business in which she materially participated.

However, if she is working in the real estate field (i.e. as a GC) but working for someone else (i.e. an employee), she cannot count these hours or services toward the two criteria stated above unless she owns at least 5% equity in the business she works for.

If you can elaborate on your wife's business activities I will be able to provide a clearer picture.

@Anna Stolpe 

You must always take depreciation regardless of what your income level is. Your CPA is referring to deducting losses generated by real estate activities. He/she is also assuming that you are an "active" participant in your RE activities. As an active participant, once your income exceeds $150k, you cannot deduct any amount of tax loss generate by RE activities against your ordinary income. Any loss that you are not able to deduct is "excess" and is carried forward until it can offset passive income or you sell your property.

I'll highlight the three activity levels below. It should be noted (as someone mentioned above) that people who can be classified as an RE professional will reap the benefits.

The first level of participation is simply "passive" participation. If you do not "materially participate" in the RE activity, then you are not an active participant and carried forward passive losses can only off-set passive income.

The second level of participation is "active" participation. If you are an active participant, then you receive a special allowance up to $25,000 in which you can deduct passive losses against your ordinary income. You are an active participant in a rental real estate activity if you owned at least 10% of the rental property and you made management decisions or arranged for others to provide services. "Management Decisions" consist of approving of new tenants, deciding on lease terms, approving expenditures, hiring contractors, etc.

Limitations exist and center around your Modified Adjusted Gross Income (MAGI), which is reported on your Form 1040. If your MAGI is high enough, it may disqualify you for the special allowance. If you are single or married filing jointly, you may use the full $25,000 allowance if your MAGI is $100k or less, meaning if you have a $25,000 rental loss for an RE activity in which you actively participated in, you can use the entire loss to offset your ordinary income. The allowance begins to phase out by fifty cents on the dollar once your MAGI goes over $100k and is completely eliminated once your MAGI hits $150k.

If you were not an active participant in the activity in prior years, but this year the activity becomes active because you materially participate, then suspended passive losses can be used to offset income from the new active activity, but it must be the same activity as when it was a passive activity. And again, if your MAGI is above $150k, you won't be able to deduct the losses anyway.

The third level of participation is being classified as a real estate professional. If you are classified as a real estate professional, all real estate losses can be used to off-set your ordinary income. To qualify, 51% of the personal services you performed in all trades or businesses during the tax year must be performed in real property trades or businesses in which you materially participated AND you performed more than 750 hours of services during the tax year in real property trades or business in which you materially participated.

However, if you are working in the real estate field (i.e. as a broker) and working for someone else (i.e. you are an employee), you do not get to count these hours or services toward the two criteria stated above unless you own at least 5% equity of the business you work for. 

Hopefully reading this will save you from having to sift through the IRS code.

@Account Closed Hey thanks for the kind words. To be clear, I do not actively encourage people on BP to invest for two reasons: there are others with much more valuable information to share regarding general real estate investing; and I don't want to have the image of driving people to invest to drive my business. I do however, however, share accounting and finance insights when applicable. 

In my previous post, I wanted to speak to your question as to why so much free information is out there, and I wanted to show you how and why I contribute to that information. While you are right, my area is much more niche, there are many niche areas in REI.

To be honest, plenty of people can provide tax/advisory services without ever needing to have a CPA. I don't worry about those people because I know I have the drive to make my services better. In the end, I know I can execute better than anyone I share information with. I feel like that thought process can be applied to many areas of REI, regardless of how niche the service or activity.

It all comes down to execution, and very, very few people have to drive or means to execute.

@Account Closed 

The information is out there for a variety of reasons.

Why share insights with your competition? Well, if they are paying you for it, why not. Keep your enemies close, and you will always be ahead of them. For instance, you can train someone and then sell them your assets or ideas, then use their money to take yourself to the next level, then sell them information at the next level. Why wouldn't you want to do that? Maybe they will catch up, but that's unlikely. People are eager to spend money to learn how to do something yet very few ever act on it. 

Real estate investing also encompass a broad range of services and activities. You have buy-and-hold, flips, wholesale, wholetail, notes, liens, property management, tax, 1031s, etc. etc. Because there are so many sub-industries, sharing general knowledge will not likely threaten one's livelihood. For instance, someone can share information on how they successfully flipped a house, but what they may not share are all of the business systems that are working behind the scenes. Those business systems took years to set up and learn how to operate efficiently. And even if someone did share EXACTLY how to set up a business, it will still be difficult to replicate because that person likely has years of experience under their belt. So in the end, you are buying their products and they are never really worried that you will be able to compete with them.

What's in in for BP? The real estate industry is still full of arbitrage opportunities because data isn't readily available and comparable. Due to this, home buyers/sellers act with caution and some still end up getting ripped off. This causes a market for information, and people like FREE information. That's where BP comes in and the platform is quite valuable since it drives so much traffic. Josh recognized early on that there was a need for relevant information and he created a way for users to share information. BP enhances the real estate investing experience my making information and data available, and Josh gets paid. That's why BP is here.

Why are people so helpful? Why are people posting free information? If people are posting free information and being helpful, they are likely expecting to receive some sort of benefit on the back end. That doesn't necessarily mean their intent is malicious (like a guru). Very few people are helping others out of the goodness of their hearts (though there are those that do!). Some people want to network, some want partners, some want to sell. 

I personally want to establish credibility in the real estate investing space so that when I launch an accounting firm, people will see me as a  trusted advisor and in turn consider becoming a client of mine. I attempt to establish credibility by making my posts as valuable and as helpful as possible for the reader/target market. I honestly do want to help others. That's what motivates me and drives me. Do I expect to charge a fee for my services? Absolutely, because my services will be the best out there. And in order to demonstrate this to the community, I take the approach of sharing my insights and information I gather freely for everyone to view and consume. 

@Lewis C. Since you have a partner, putting the properties into a LLC makes sense. Make sure you are aware of the rules surrounding LLCs because in the event that a tenant does sue, you don't want the opposing lawyer to "pierce the corporate veil" and have your LLC rules as a disregarded entity.

Your properties being in a LLC will likely protect your personal assets in case a tenant does sue. To protect your equity in the properties, you may want to consider setting up an additional LLC that performs property management functions such as leasing, hiring maintenance crews, etc. Your property LLC then contracts your management LLC and if the tenants have issues, they take it up with your management LLC, thereby protecting your equity in your properties. That is obviously a high-level overview, so you will want to discuss with a lawyer that can analyze your situation and provide you with more detail.

@Natalie Kolodij While placing each individual property into an LLC will provide you with maximum asset protection, it often causes an accounting and legal mess of which the cost is generally not worth the hassle. Of course having another entity own all the LLCs can simplify the process.

But a problem with the parent/subsidiary structure (i.e. having 4 LLCs and a parent S-Corp) is that you are essentially placing all of your expensively created separate entities that you formed to maximize asset protection in one basket. If a creditor sues the parent and gets a judgment against the parent, the creditor can likely reach all of the parent’s sub's.

Best bet - consult with a lawyer. 

Not legal advice.

@Chris B. Correct me if I am wrong, but it seems you have $170k of equity (290-120) in the home as of right now. What you need to evaluate is the opportunity cost of leaving that money in your home vs. investing elsewhere.

You are estimating your $170k will generate $1475/mo gross and $122/mo net. This leaves you with an annual return on investment of 0.8%. I have no idea if your numbers are accurate, but that is a really weak return. If you are afraid of risk, you can invest in notes and see 3%+ annually. 

In a college market I am looking into, you can buy houses for $120k that gross $1600/mo and net $400/mo (on the really conservative side) which produces an annual return of 20% (assuming you put 20% down). With $170k, you could buy 7 of these properties and NET $2800/mo.

From a tax perspective, you have a $110k gain (290-180) which you can collect tax free as long as you have lived in the property for the past two out of five years. So if you do decide to rent, I definitely would not rent for more than three years, otherwise you may lose out of protecting your capital gain.

@Nelya Calev On what grounds would they sue? You have documents showing that you tried fixing it, so they can't sue for negligence, which is what it sounds like they are wanting to do. It seems like baseless threats in my opinion.

Check with the laws in your state about removing them from the house and putting them up in a hotel. I know in D.C. there is a law that allows the landlord to remove tenants from the property when the property is in need of a significant repair, but I don't know all the details and exactly what it entails.

@Steve T. 

As in all accounting scenarios - it depends.

Do you have applicable financial statements? If so, the De Minimis Safe Harbor Election allows you to expense $5,000 per invoice. The definition of “applicable financial statement” requires preparation of the statement in accordance with U.S. GAAP and use of the statement in filings with the SEC or with any agency of the Federal government other than the IRS.

It is unlikely small business owners have applicable financial statements. The IRS determined a ceiling of $500 be employed for such business owners. If you have an expense less than $500, then you may deduct the item in the current year and rely on the Safe Harbor rules to protect you. 

You may also be able to classify certain repairs as "Routine Maintenance." An activity is covered only if you expect to reasonably perform the maintenance twice within a 10 year period. 

For example: You replace the front door and it costs a whopping $1,000. The Safe Harbor rule will not cover you here (remember, up to $500 unless you have applicable financial statements). But the "Routine Maintenance" rule may cover you. You may expect to replace the door again in seven years, and if that is the case, you can deduct the full amount of the invoice. 

Just make sure to document everything, including your reasoning for deducting certain expenses. 

@Sandy Uhlmann 

@Bill Gulley Correct me if I am wrong, but isn't the situation Sandy is describing out if the scope of a SDIRA? I know when flipping using SDIRA funds, you cannot be the "labor." Wondering if it's the same idea with wholesaling.

@Dan Perrott how you name an LLC has no effect on a lawyer's ability to pierce the corporate veil. You will be fine. If this were the case, you wouldn't have accounting, venture cap, and private equity firms naming the LLC after the founders/partners.