All Forum Posts by: Clint Coons

Cassandra,

Are you looking to get tradelines in the name of your LLC? One thing I tell my clients is to open up a business credit card with Amex, Chase, or Wells (these companies do not report back to your credit score). You will have to give a personal guarantee, and the companies will run your credit when deciding on your limit, but this is a good start. Just make sure when you obtain the card that the issuer will not report back to your credit. Step #2, work to establish business lines with home depot, office depot, etc. under your business and use the credit; otherwise, you won't get any benefit. The key to building credit is to make sure the companies you work with are reporting. Keep in mind that building credit with your business if great for trade lines, but I run into a lot of investors who believe once they have built up a credit score for their business, they will be able to buy real estate and not have to sign personally or use their credit. All I can say is it has never worked for me. I have a portfolio of over 110 properties, and unless it is a commercial or portfolio lender /asset and experienced-based loan, I have always had my credit hit. My firm offered this service at one point (15 years ago), and we stopped after about one year because our client's expectations often exceeded reality. There are some companies out there that are great with setting up lines that report. This is key - you need the lines to report. Just realize what is and is not obtainable with business credit, and your expectations will most likely be met.

How much money are you talking about?  I agree with Bill that most of these are just shakedowns by contractors looking to intimidate homeowners. The contractor is probably outside of his ability to lien your property, so he can't tie up your equity, which leaves bringing a lawsuit - possibly small claims.  Doubt it will go any further than threatening emails.  

Eamon,

If the S-Corp is engaged in the trade or business of rental real estate, it will not be considered passive.  Support for this can be found in Section 1.1362-2(c)(5)(ii)(B)(2). I would then carry the income down onto box 1 of the k-1 as ordinary income versus box 2.  I don't believe the taxpayer would need to meet the real estate professional status test, and given where the income hits; it should avoid NIIT.   Pub 527 also addresses substantial services and trade or business. Here is letter ruling as well PLR-136311-14. Granted, this is a facts and circumstances test and does not generally apply to the vast majority of investors.

Eamonn,

I am not aware of a Reg that requires a person who materially participates in an activity (Temp. Regs. Sec. 1.469-5T(a) or alternatively the substantial service test Temp. Regs. Sec. 1.469-2T(f)(2) ) to take a salary. The benefit of meeting these tests is the conversion of passive into non-passive income. Second, it is my understanding that a shareholder of an S-Corp is not required to take a salary if the shareholder is not making any distributions. In the original post, Zach stated he was looking to grow his portfolio through reinvestment of his income into real estate. My point is, depending on where you are at with your income, it sometimes makes sense to use an LLC treated as an S-Corp to minimize the NIIT tax because the income you are generating from your real estate is being reinvested. What are your thoughts?

Linda,

Yes, I am a tax attorney and investor. To address your S-Corp tax election on an LLC this is specific to the client situation hence entity structuring is never a one size fits all approach. If I am working with an investor who is not a real estate professional then I will consider the S-election on an LLC if their NITI tax is sizeable. The points you raise about salary and unemployment insurance I have not run into issues with a holding LLC treated as an S-Corp having to pay a salary to its member or manager also in my experience owner-employees are typically exempt from state worker's comp thus, I have never viewed it as an issue.

On the schedule E under lending guidelines for Freddie/Fannie loans as outlined in Regulation Z  25% of the income reported is not counted (this is to account for vacancies and maintenance).  Partnership returns are analyzed differently and the depreciation is added back in on the income.  This can also be found in the Fannie Mae selling guide.  Yes, you are correct that the underwriter will see the same info when the 1065 is turned over, but it comes down to how the lender is required to count the income.  The only drawback to having a K-1 on your return is the liquidity test underwriters must run against the company so an evaluation of the balance sheet is important to make sure the client doesn't fall into this trap.  If you would like to discuss via a call I would be happy to have this conversation.

Mike makes some excellent points about the asset protection benefits of LLC in Florida and the anonymity benefits of land trusts. One additional point you need to consider is doc-stamps. If your property is financed, then moving it directly into an LLC will trigger a transfer tax in Florida. To avoid the charge, put your real estate into a land trust then assign your beneficial interest to an LLC. As Mike suggested setting up on your own is possible, but you do not know what you don't know, and a simple mistake like I discussed could end up costing you far more than working with an experienced firm.

Zach, when planning for real estate, you should look consider asset protection, tax planning, and business planning. You have the asset protection angle nailed, recognizing you need an LLC for your rental. When looking at the tax angle, you should consider whether you plan to accelerate losses on your real estate via cost segregation. If you think you will be turn losses for the first 1-2 years, then avoid S tax status and opt for partnership or disregarded tax status. If you anticipate annual rental income over 50k, then consider S status because with your 140k w-2 as a single individual, your rental income will be subject to the 3.8% NITI tax. Now the business angle consideration. I like to avoid having my clients portfolios hitting their return on page 1 of their schedule E via disregarded LLCs because Freddie/Fannie loans limit how much of the income you can count toward your debit/income ratio for future investments. If the income hits page 2 via a k-1, you will get credit for 100% of the rent. As your portfolio grows, this can have a sizeable impact on your ability to borrow. Here is a solid structure to consider- create a holding LLC taxed as a partnership (you own this entity, and it is set up in a state with anonymity to keep your ownership private) this LLC will hold special purpose disregarded LLCs set up in states where your real estate is located. All income/loss will flow through to your holding LLC then on to your 1040 via a k-1. As the income grows, then explore the S election angle if you notice the NITI tax taking a bite out of your income. One last point - you typically do not want to make a C-election for rental real estate because you will give up LTCG treatment and the loss benefit of real estate investments.

The acceleration clause can be triggered if a property is transferred to any entity (LLC, land trust, corporation, etc.) if the loan allows for acceleration. Some loans permit assignments, e.g., portfolio loans, Fannie Mae, etc. Even if your lender has an acceleration clause, this should not drive your decision making. Lenders are in the business of loaning money, not owning property. In 20 years of practice, the handful of instances where I have seen a lender accelerate a loan always dealt with the owner not performing, I.e., falling behind on mortgage payments or not insuring the property. Ask a broker how many times they have seen loans accelerated, and the answer, in my experience, is little to none. The real issue as I see it based on your post is the financing angle. If you plan to refi the property, complete all your financing before moving the property into an entity. After the funding is complete, then explore your land trust versus LLC options. The land trust has some benefits, but this is not to say, placing the property directly in an LLC is the wrong way to go. I use land trusts strategically to obtain specific goals with my investing. My portfolio is well north of 100 properties, and I have used land trusts less than ten times, and each time the decision was driven by the investment and not a concern over what a lender may or may not do.

The first question I would need you to answer is where are your investments located? It's difficult to make a recommendation without knowing where your investments are located and where you plan to invest. Second, are the properties encumbered? Third, are you in a high-risk profession that increases your personal liability exposure? Setting up multiple land trusts and placing all of your properties into one LLC is not an effective strategy unless the investments are located in Florida.

For a SF rental, you should not use a corporation to hold the asset. A corporation is an ideal choice for an active real estate business e.g., flipping. Whether you use an LLC or not depends on your risk tolerance. Insurance can protect you but certain claims are not covered e.g., toxic mold, vicious animal, claimed discrimination, etc. An LLC will limit your overall liability exposure to these claims and protect your investment from claims made against you individually. I have never worked with a client involved in a lawsuit who regretted having an LLC but the opposite has generated a lot of stress for unprotected investors.