All Forum Posts by: Brian Schmelzlen

Hi Jessica,

If you do not currently work with a CPA, you probably will soon because it sounds like your tax situation will become a little more complicated.  A lot of DIY tax software is good, but it does require a decent understanding of the tax law to ensure that you are not missing big tax deductions.

I would consider reading information that CPAs put out for free on their blogs (you will find a number of good articles through a simple google search).  From there, I would suggest meeting with a CPA (one who offers a free consultation for potential clients).  That way you can ask questions once you narrow down what is relevant to you.

Hi Scott,

Your attorney's suggestion that you have a CPA that is familiar with New York and Virginia state tax laws is a good one, but that doesn't mean you need a CPA who lives in either of those states as long as you are comfortable that he/she is knowledgable about those states.  For most tax planning, you will be focused on federal tax laws anyways.  You mostly want someone familiar with Virginia and New York tax laws so that they will know there is an issue when the states' tax laws are not in conformity with the federal rules.

Virginia does have an "Other State Tax Credit"; they require that you provide attach a copy of the other state's tax return to your Virginia tax return and then you will receive a tax credit for your payment to the other state (New York).  I would find a CPA who has dealt with it before, however, because my experience with Virginia is that they are quick to disallow valid OSTCs.

In regards to your other question, you are allowed to make distributions from the LLC to yourself as the owner. However, there is something known as debt-financed distributions that will potentially impact the deductibility of the related interest on the LLC level. You will want to work with a CPA who is familiar with the debt-financed distribution rules and how to minimize its impact.

California and every other state has all kinds of mandates built into their building codes.  Most at least claim to be justified by safety concerns, although (at least in California) there are a significant number of other interests at play in most of the building mandates.  The biggest difference with this one is that there is not a pretense that it is a safety concern.

In general, I don't care for government overreach.  However, I think that in California things were trending towards solar panels on more and more homes anyways so I think this just accelerates the process.  Additionally, as electric cars become more popular (particularly in states like California) more homes would end up installing solar panels anyways.

I think getting rid of PMI as soon as possible is great because it is just an extra expense that does not benefit you.

In terms of getting your credit it, I would talk to local banks and mortgage brokers now to see how much of an impact your credit score will actually have on you.

Hi @Ryan Kowalewski,

What your advisor is suggesting is a fairly standard structure.  As @Michael Plaks mentioned, we would need a lot more information in order to really offer you advice.

In general though, I think it is a fairly good structure. I personally don't like the idea of having real estate that you will be holding long-term in an S-corporation, so I like the suggestion of having it in an LLC. My reason is that there are potential tax consequences to distributing real estate (or any other property) out of an S-corporation, and there can be good business reasons to need to take the real estate out of the business. I think having it in an LLC preserves flexibility.

Whether the operating business itself should be an S-corporation or an LLC depends upon a lot of factors specific to the business and your state's tax laws. A number of states have separate taxes and fees assessed against these entities even though they are pass-through entities taxed at the individual level (except for LLCs taxed as a C-corporation). California, for example, has an $800 LLC Tax and potentially an additional LLC fee based upon your business revenue (not income). For S-corporations, California assesses a tax at the greater of $800 or 1.5 of net income (not revenue).

Also, you need to factor in whether the new tax law changes things for your situation. In the past, a C-corporation could almost be dismissed out of hand because it wouldn't make sense for most situations.  With the new tax law creating a flat 21% C-corporation rate (with double taxation still a factor), it is an option that should be discussed.  It still does not work for many situations, but if you are expecting good profits but will be reinvesting most of them in the business for a few years it may make sense for you.

That is way too generic of advice that does not work for all aspects of real estate investing.

If you are in the rental business, an LLC generally makes sense.

However, if you do fix and flips or development, an LLC may be a massive mistake because of self-employment taxes. In that case, as a general rule you would want to use an S-corporation.

Those are just general rules; talk to a CPA before setting up a business entity because your specific situation might change things enough that the general rules don't apply to you.

In terms of what state you should be established in, you should be aware that a number of states force you to pay taxes in the state that you reside (e.g. California and New York tend to have you file based upon residence) and most states will have you file in the state if you are doing business there.

I wouldn't bother buying a book about them.  There is a lot of free information online (CPAs and business attorneys in particular will often talk about the differences between them in blog posts).  Also, each state will treat them somewhat differently (different taxes and fees attached to them) so you will want to look at state specific resources when possible.

This is not exactly an answer to your question, but might be useful information for you to have if you are forced to make improvements to the building to comply with ADA requirements.

There is a tax credit worth up to $5,000 for making "eligible access expenditures" to comply with ADA.  If you are forced to make ADA improvements, talk to your CPA about this.

I started using an online bank for a savings account last year, and they have steadily been raising the interest rate; its 1.5% now.  I keep the money I will be spending that month in that account until I pay the bills.  Its not much, but its nice to get a few bucks of interest every month rather than a few pennies if that.

In general though I have just been trying to bring lunch from home every day rather than buying it.

Please let me know if I am misunderstanding your question.  I am assuming that you are referring to the fact that as a house flipper you will be paying ordinary income rates rather than the lower capital gains tax rates.

I suppose you can look at this as a penalty, but I wouldn't look at it that way.  Being a flipper, you would be treating your property as inventory, so like any other business that sells their inventory you are paying ordinary income tax rates on the sale.

Essentially, the tax code treats flipping as a business, but rental properties as an investment. 

I am confused by something you said though.  You said that because you overspent on the rehab budget you want to treat it as a flip rather than a rental.  This doesn't make sense to me because if you overspent on the rehab it doesn't sound like you will have much profit, so a rental might be the best way to salvage the situation.