All Forum Posts by: Bob Norton

Owners of LLCs (that are taxed as sole proprietorships or partnerships) can withdraw funds or contribute funds at will and those transactions will not be considered co-mingling of funds. So, if one property needs a new roof and another has the funds, then you can withdraw the funds from one, deposit that into the owner's checking acccount (which is called a distribution) and then transfer the funds from the owner's checking into the other LLC (which is called a contribution). Another way to handle this is to loan the funds from one LLC to another, using a promissory note. Where LLC owners get in trouble is when they transfer funds between LLCs without any formal paperwork (promissory note) or reimbursement (this is considered co-mingling of funds and can negate liability protection).

@Ozzie Ramirez Great Job!

@John Flanders In the early years, you may not have any taxable income due to your depreciation deduction. I would be more concerned initially with your reserve for capital expenditures. You should consider how long it may be before you have to replace any of the major systems of the houses to make sure that your cash flow will have time to build up a reserve for replacing those. You will also want to determine your ROI on the cash flow to see how that compares to other investments.

@Sonia Rodriguez Where the situation is complicated, there is opportunity.  You just have to figure out all the pieces and try not to spend too much money until you know that.  Hopefully, one of the attorneys on BP can add to this post.  It seems to me that if John died intestate and had 8 heirs, of whom only 3 are living, then you will also have to track down the heirs of the 5 who have passed away.  You are not only dealing with 3 heirs, you are be dealing with the extended family.  But, if you can track that down and get everyone to sign a contract to sell it to you, then you may have a deal.  It will be a lot of work.

@Gerardo Ali S-Corps are the preferred entity for rehabbing/flipping. If you are renting the property, then you should put it into an LLC. That way you get to include the debt on the property as part of your basis and be able deduct the loses in the early years from interest and depreciation. Rental property is not subject to SE tax, so putting it into an S-Corp to save SE taxes is not necessary. In addition, as an S-Corp owner you are required to pay yourself a reasonable salary when you do make a profit so you will then be creating more tax, instead of saving it. Also, as an S-Corp, you do not get to use debt as your basis, so any losses in the early years will be suspended until you begin earning profits, so you would not get to deduct any of the losses in the early years to offset any other income. Finally, you will qualify for a bigger QBI deduction if you make a profit with an LLC, because you will not be paying yourself any wages which will increase your pass-through income and your potential QBI deduction. Wages generally reduce QBI income and the related deduction.

@Daniel Mendez You are not taxed on cash flow, but on taxable income, which takes in consideration depreciation expense, but does not include any principal payments on debt.  Also, your tax rate depends upon your other taxable income sources.  With that being said, if your cash flow is from rehabs, then most likely you don't have much depreciation to consider and you should set aside around 1/3 for Federal tax plus the tax rate for your state.  If you are a landlord, then you may not have any taxable income even though you have positive cash flow.  But if you are generating taxable income, then you may want to set aside 1/4 of net rental income plus the tax rate for your state.  These figures are conservative and work for ballpark numbers.  You should discuss this with your CPA to determine what percentage you should use based on your specific tax situation.

@Stacey Vilardi You could consider renting your rehab for a period of time to reduce your taxes.  If you rented the property after rehabbing it, then you would be considered a landlord instead of a dealer and save on SE taxes.  If you sold the property after you owned it for 366 days, then you would only be taxed as long-term capital gains.  Furthermore, if you rented it for a period of time, then you would most likely qualify for a 1031 exchange.

@Shane Hummus  You could consider a whole life policy and fund it to maximum allowed before it is considered a modified endowment contract.  I suggest you read this book: "Becoming Your Own Banker" by Nelson Nash.  Also, "What Would the Rockefellers Do" by Garrett Gunderson.  A lot of financial planners and CPAs hate whole life policies, but they do not understand these concepts.  It gives you tax free growth, without having to worry about the stock market, and you can borrow from your policy to fund your real estate deals.

@Bradley T. From a tax standpoint, if you and your wife want to keep the property as a rental, then you will simply be partners in the property.  If your divorce is amicable, then this will work.  If not, then you may want to consider other options as the rental partnership may be unstable.  In either case, I would recommend that you have your attorneys draw up a partnership agreement pertaining to the property.  

@Michael Dunn That depends upon the lender.  The fact that you have a lease on the property may be good enough for your lender.  You should talk to all the commercial bankers in your area to see what their policies are and if they can refinance the loan.