All Forum Posts by: Brian Schmelzlen

Hi @Dwight Rhodes,

Whether or not you should have a business entity like an LLC to hold rental real estate is certainly a hotly debated topic on BiggerPockets. However, if you already formed a business entity, then you should either be using it to hold your property or dissolving it; it doesn't do you any good to simply have a business entity formed and not use it and might cost you money depending on whether Texas charges any fees for it.

Whether you are working with a tax preparer or not (I recommend that you do), the first thing you need to do is make sure that you have all of your information gathered in a presentable way.

If you purchased the property in 2018, you will need your final settlement statement to determine the final purchase price (including closing costs) for depreciation purposes.  You will also need a property tax statement (unless you have an appraisal or something similar) to help you properly allocated the purchase price between the land and the building.

Next you will need your financials for 2018.  That means all of your rental income and expenses.  If you used a property manager then you will have a property manager's report that will make this very simple.  If not, you will want to take the time to make sure that you are presenting your rental income and operating expenses in a clear way.

Finally, you will need the Form 1098 showing the mortgage interest (and possibly the property taxes).  Those might not be included on the property manager's report so I am listing it separately

Real estate can be a great tool for tax planning.  However, a lot of those benefits come as the investments grow and not necessarily up front.

However, for a real estate professional it is possible to get huge write-offs immediately.  For buy and holds, you are entitled to depreciate the full cost of the property (less the portion allocable to land), and not just the down payment (i.e. if you buy property for $1 million but only pay $200,000 the full $1 million is depreciable- as long as none of that is allocated to land).  However, that is normally over 27.5 years or 39 years depending upon the type of property.  If you get a cost segregation study though that identifies a significant percentage of the property is actually personal property with a 5, 7, or 15 year life you would be able to depreciate it much faster- perhaps even in the year of purchase with the new accelerated depreciation rules.  So in that same example, if 20% of the building could be reclassified as personal property through a cost segregation study that means potentially there would be a $200k depreciation expense.  That might mean a large tax write-off IF the owner is a real estate professional (otherwise passive loss rules apply).

Since your brother owns another business it is doubtful that he would be able to qualify as a real estate professional, but if he is married his spouse might.  If his spouse qualifies as a real estate professional, they could purchase the commercial property the business is located at and rent it to the existing business at a fair rental rate.  That MIGHT generate tax savings in the year of purchase.

NOTE: Your brother should talk to his CPA about this before considering doing it himself.

In this case I think a business transaction attorney would be best.  However if you can find an attorney with some estate planning and real estate knowledge that would only be helpful to you.

Hi @James Sea,

Obviously you would need your reserves to be held in a very liquid account.  Therefore, checking account, savings accounts, and money market accounts all work.  However, that doesn't mean you have to settle for getting almost no interest.  I like online banks' saving accounts because they pay a good interest rate.  I believe Ally is currently paying 2%.

Of course, there is nothing stopping you from having multiple accounts (assuming no fees).  For example, if you have a cap-ex reserve that could probably be in a less-liquid account (such as a short-term CD) since you may have a higher degree of confidence that you will not need to touch the money for a few months.  Be careful with that though; make sure you have access to money in case of an emergency.

Hi @Jamie Brayton,

Are you looking into starting to do a lot more flips, or is this a one-off deal?

The issue with doing too many flips (as an individual or an LLC) is that the IRS will attach a "dealer" status to you and treat all of your investment properties as inventory. That is fine if all you are doing is flipping, but since you mentioned that you have buy and holds you want to make sure that you don't lose the tax benefits of rentals.

To avoid having the dealer status attach to you personally, I would consider doing the flipping through an S-corporation.  Corporations are considered separate legal entities, so the dealer status does not pass through to you as an individual.

The other issue to consider is self-employment taxes. As a buy and hold investor you did not have to deal with these, but as a flipper you will. As an LLC all of your flipping profits will be subject to self-employment taxes. As an S-corporation you would be required to pay yourself a reasonable salary before taking distributions, but you wouldn't pay any self-employment tax. You would just pay payroll taxes on the reasonable salary. This could potentially save you quite a bit in taxes over time.

I would discuss this in detail with your CPA.

Hi @Benjamin Cohen

@Benjamin CohenBill is right that if you are looking for someone who you can sit down with in person in your area, your best bet is talking to other investors in Chicago to see who they use. However, if your first priority is finding someone knowledgeable with taxes in the REI space, I would suggest reading posts from CPAs on BiggerPockets to see if there is someone who seems good to you. From there I would arrange for a phone call to discuss your specific situation and see if you are comfortable with that person. In that case, finding someone in Illinois would just be a bonus, not the main attraction.

Hi @Colten Roney,

The best way to find a good CPA, especially one that knows about real estate investments, is to get a referral. A referral from someone of BiggerPockets or a local REIA should hold a lot of weight. Then you will want to talk to that CPA. That person being knowledgeable counts for a lot, but it is also very important that you are comfortable with that person.

In terms of how much you should be paying, it really depends upon your situation.  Someone with a W-2 job and a rental property or two will be charged a lot differently than someone with multiple K-1s, brokerage accounts, etc.  While price definitely does matter, I would ask more about what kind of services you will be provided throughout the year and how you are being charged (set fee, hourly- there are advantages and disadvantages to both).

Hi Bruce,

The first question isn't what entity to form, but whether you should form an entity at all.  That largely depends upon your personal situation, but in general a new investor can be covered by a very good insurance policy.

If you decide that you should have an entity, what type of entity you form (generally an LLC or S-corp, although there are other options) depends upon what type of investing you are doing and how you want things to work. For example, are you looking at rentals or fix and flippers. I see that you are a flipper, so in most cases an S-corp would make more sense for you.

What makes a great deal all depends upon your goals: long-term equity, cash flow, etc.

For me, a great deal is a commercial property that is more than 50% vacant in a good area that only needs moderate improvements to make it appealing again to potential tenants.  I look for properties that can have decent cash flow but great value-add potential because I would want to pull my money out through a refi.