All Forum Posts by: Bob Norton

@Account Closed If you are the only member of your LLC, then it is disregarded for tax purposes, which means that you do not have to file a tax return for it and thus the costs are minimal. You will have to maintain the LLC in the state in which you live, which usually requires an annual report filed with the Secretary of State's office in your state. If you happen to be in California, then you will have to pay a minimum of $800 franchise fee when you file your personal tax return. If you are using a firm as your registered agent, then you will have their fee to pay each year, as well.

@Karen O. Actually, a real estate professional still follows the active/passive nature of income.  So, if you earn income as a realtor, then you pay SE taxes.  If you earn income as a landlord, you don't pay SE taxes, even if you're a real estate professional.

@Hector Test Yes, your cost of materials and services are expenses that you get to deduct when you sell the property.  Any costs spent to build the house is capitalized and then expensed when you sell the house.  So, if you purchase the property and build the house in 2020 and then sell the house in 2021, then you do not get to deduct the costs of purchase and construction in 2020 and will get to deduct those costs in 2021 when you sell.

As @Christopher Smith mentions, intent is important when you purchase a property.  That can determine if you pay additional self-employment taxes on your income, or the low capital gains tax rates.

It sounds like your intent is to be a builder/developer, so you will be paying the highest tax rates possible.

Since you are operating as a business, you will get to deduct any related business expenses as well.  However, the only way to defer taxes as a builder is to wait to sell your properties.  Because as soon as you sell them, you have a taxable event.

The beauty of real estate is that you can structure your deals so that they are set up as investments, which are treated favorably under tax law.

I recommend that you discuss your business plans with a CPA who is familiar with real estate investing and who then can advise you on how to structure your ventures to lower your taxes.

@Brett S. You should get an opinion from a different CPA.  If you paid more for the property than your original CPA recorded for the property, then you should be able to include the additional amount in your basis.

@Hector Test The tax law doesn't work that way.  In your example, you will have a $100k profit on the construction of the house (taxed as regular income, not capital gains, because you are a builder/developer).  You do not get to deduct purchases of property against your income until you sell the property.

You could defer the tax using a 1031 exchange.  However, you would have to be an investor and not a builder/developer to do this.  Property for builders is considered inventory, which does not qualify for a 1031 exchange.  So, you would have to convert your property to a rental in order for it to qualify for a 1031 exchange.

@William Lackey Rental real estate is a business.  You can deduct any reasonable and customary business-related expenses for your rental business, including mileage, travel, meals and a home office.  You will need to document the business purpose for your expenses (usually writing a contemporaneous note on the receipt or your bank statement will do).

You can setup an LLC for your rental business if you want. LLCs are good for liability protection. They have no affect on the amount of deductions you can take for your business.

Since your wage income is above $150k, you will not be able to write off any rental losses.  However, your losses will be suspended and carried forward to offset rental income in the future.

You could consider getting a real estate license as @Karen O. mentions.  This would be a separate business from your rental business.  

However, you do not have to be a real estate agent to be a real estate professional under tax law.  A real estate professional as defined under tax law allows you to write off rental losses with no income limitations.  However, claiming yourself a real estate professional with a W-2 job can be problematic due to the rules for qualifying.  Talk with your CPA if you want to claim yourself as a real estate professional.

@Devontae Jones Check out the North Louisiana Investors Group on Facebook to network with local investors, in addition to BP.  You should definitely check into any local REIAs and maybe visit some in other parts of the state (even in AR and MS).  It's always great to meet investors at these meetings.  A lot of investors you meet are not limited by geography and will be willing to invest in your area.

When you do meet investors at the REIAs, make sure you ask them if they are buyers and what types of homes they invest in.  Keep good notes and add them to your buyers' list.  Then, when you come across a property that meets their criteria, you can contact them first for hopefully a quick sale.

Good luck!

@Andrew Gomez Sounds like your financial officer doesn't want to do the loan and doesn't want to tell you no.  So, he asks for a financial report that's prohibitively expensive and time-consuming in hopes that you will go away.

I recommend finding a different banker.  You should be able to give them a couple of years of tax returns as proof of income.

@Daniel Dunnigan It sounds like your Dad borrowed money from his HELOC and then loaned that money to the partnership to purchase the land. If the partnership is paying back the loan from the HELOC, then it's technically paying back your Dad, plus interest. The partnership could deduct the interest paid to your Dad. Your Dad would recognize the interest income from his loan to the partnership and then deduct the interest paid to the HELOC on his tax return (assuming that he can itemize). You should discuss this situation with your CPA and possibly an attorney to make sure you document the transaction properly.

Even if you keep the transaction as a gift, then you still should get with your CPA and attorney to document the transaction property.

You can move the property into an LLC. This adds some liability protection for the three of you, but does not change the tax situation.

Based on the numbers you have given above, you will still have some income to report, which will be rental income. You'll receive $7k in income less property taxes less the interest on the HELOC (if you set this up as a loan from your Dad). You cannot deduct the principal payment, unless you treat the entire HELOC payment as a rental payment to your Dad (in which case you and your Uncle are pushing all the tax liability to your Dad, instead of the three of you sharing that cost.)

Sit down with a CPA to discuss the different scenarios and which one works out the best for all three of you.  Your CPA may also come up another strategy that differs from any discussed above.

@Bryce McBride Calculating the ROI on a personal residence can be complicated. Most people don't think about, or take into consideration, the value you received from the property for living there (and not paying rent otherwise).

So, I would simply sum up the amount of your original down payment and any improvements made to arrive at your investment (ignoring your mortgage payments, as these would have been rental payments otherwise). Then, you would calculate your cashflow from a prospective tenant by taking the annual rents and subtracting the annual cash outflows (mortgage, insurance, property taxes, expected maintenance and vacancy). Now you can calculate your ROI by dividing your annual cashflow by your original investment. This would give you a quick number comparable to any new investment.

If you use the market value of your property as your investment, then you will be calculating your yield instead of ROI. Yield does not take into consideration that the appreciation and equity in your home is not a cash investment, only what type of return you could expect if you paid market value for a similar home with similar cash flows. This figure is useful for comparing two new investments, but not an existing property and a new investment. For that, you should be comparing net cash flow.

You can always refinance an existing property to pull out the equity to use in another investment. By pulling out your equity, you goose your future ROI in the existing rental property.