All Forum Posts by: Brandon Hall

Hi Danielle,

Yes that is correct, sorry to cause confusion. A C-Corp generates accumulated earnings and profits. An S corporation is not permitted to generate more than 25 percent of its gross receipts from passive income in any given year if it has accumulated earnings and profits. So if your S-Corp has never been a C-Corp, you will be fine in that regard.

One other thing I'd like to mention - in an S-Corp, you may only deduct losses to the extent of your basis in the S-Corp. Specifically, losses are limited first by your shareholder basis, next by the at-risk requirements, and finally by the passive activity limits. In theory, if you are taking large losses for tax purposes on your rentals, you may not be able to deduct them in full. Instead you would be carrying the losses over into future years. 

Not legal advice. 

**Edit: Here is a good article explaining it -http://hbsbusiness.com/index.php/site/articles/s-corporations_loss-deduction_danger/

There isn't a dire need to find an accountant local to you. Many times, Skype, emails, and phone calls will suffice. 

If I were you, I'd look at sub $100k houses in your area (if possible) or within an hour drive. Learn the market well, get a feel for needed repairs, understand cash flow, taxes, and returns. 

To get domestic or international exposure, I would look into high yield REITs. Some of them will nickle and dime you, but there are several solid REITs out there. And they generate truly passive income.

I spoke to a small lender in the local area I am looking in to. He also has not heard of that rule, but did say different lenders have different requirements as many of you have been saying here.

I am speaking with a few more lenders and I will report back here with my findings tomorrow evening. Thanks for the help so far everyone!

@Shaun Carl I do qualify for "a" loan but I was trying to include the cash gift as part of the down payment to increase my purchasing power. 

I could make a large balloon payment, but at that point I'd want to use the cash gift in a more effective manner return wise. 

I am only going through the pre-qual process. I have a few properties I am targeting but I am not rushing to get a deal done so I have time to figure this out.

A. Yes you are correct. S-Corps are there to protect your distributions from the employment tax. Only your wages will be subject to employment tax. So take a market wage, then pay yourself distributions on top of that.

B. Correct. 

C. The reason that Steven suggested flips in an S-Corp and passive rental income in an LLC is that an S-Corp has passive activity requirements (passive activities cannot be greater than 25% of gross income). An S-Corp will provide you with limited liability (only liable for what you put into the S-Corp) as long as you do not "pierce the corporate veil" which basically means don't co-mingle personal expenses with your S-Corp funds.

Could even be a directory in MS Excel where members who post on said "Boot on the Ground Thread" have their information added to the directory. 

You could then search by experience, certs, quals, etc. 

I'd like to point out that it does not have to be treated as interest expense. Typically you would amortize loan origination fees related to a revolving line of credit over the life of the loan. 

Should you decide to convert your revolving line of credit to a term loan, the lender would recognize the unamortized net fees or costs as an adjustment of yield using the interest method. 

If you want to classify the origination fees as interest expense, you can, you just need to disclose that in your statement of accounting policy.

If you'd like to read more, go to page "FAS91-7" of the document below and look at #20 part B. It discusses what I just told you in a bit more detail.

http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175820925889&blobheader=application%2Fpdf

1. S-Corps gross passive income cannot exceed 25% of total gross income. So your rental properties may be classified as passive depending on the trade or business your S-Corp is involved in. S-Corps are primarily set up to avoid Self Employment Tax, so when you lose the S-Corp status, tax consequences may be significant. 

2. In most states, the ownership of real estate does not constitute the transaction of business. For that reason, if you have a foreign LLC, you may not be required to register it in the state in which the property is held. You can place your property in an LLC registered in any state, regardless of where the property is located.

Note though that the members of your LLC may have to pay personal income tax in both states. Generally you will receive a credit of some sort. You should consult a tax professional in your area.

3. See my answer to question #2 above.

If I were to write something like this, I'd want to benefit myself and others in their investing endeavors. Why don't you write about the trends of rental markets and the future of the real estate investment?

Or study real estate history, and speak to the current state of the market. Are we in a bubble? Is a bubble looming? How much more growth is expected? You could even devise a model and speak to that as well.