All Forum Posts by: Daniel Schiff

Quote from @Michael Plaks:

You are. 
1031 exchanged are not applicable to flips. They are for hold properties.

 Understood - so if I hold for a year as a rental would open the option for 1031 (and also to sell as capital gain versus ordinary income).

Quote from @Michael Plaks:

No. You cannot "1031 a balance."  1031 is for exchanging one rental property for another rental property.

Sorry for my short comment "1031 the balance" but in essence if I exchange a property sold for $300k with a $150k basis and buy one that is $250k with intent to rehab ($75K with an ARV of $425k)- I'm deferring part of the gain ($100k) from the first property via the exchange and paying tax on the $50k I take out. My reference to my scenario is this (from IRS):

https://www.irs.gov/businesses/small-businesses-self-employe...

"Generally, if you make a like-kind exchange, you are not required to recognize a gain or loss under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, you must recognize a gain to the extent of the other property and money received. You can’t recognize a loss."

Am I reading this incorrectly?

Quote from @George Skidis:

50/50 partners is a partnership. 

For the most part a single member LLC is a pass through. Without specific "Spouses" language in the LLC Operating Agreement a multimember LLC is not a pass-through entity. So, unless you hired a great attorney your LLC is probably a Partnership and is required to file form 1065 and issue K-1s to the partners. Partnership returns are due on the 15th of March.

On a 1040 Personal Income tax return Schedule C is for a sole proprietorship. It is assigned to one spouse and it stays that way. Schedule E is vague on the matter.

You need a good attorney and a great tax preparer. Don't have one PM me.

Good Luck and Good Investing!

George

You are correct it is a partnership return, not a pass-through - I reviewed my TY22 returns and saw how they were filed.  Honestly, it was "perfunctory" at the time since I had just formed the entity and had no income in TYT22 - I was happy to have it filed and compliant.  Planning now that I have a rental active in the portfolio and two flips on track for 2024 to be more active in the planning.

For background - we formed the LLC in June 2022, did our first deal in fall 2022 ($180k purchase ($140k mortgage + LOC for $105k rehab) and put it into service March 2023 (2 unit rental). Appraised at $450k and did a DSCR Cash out refinance into $300k mortgage.  Cash and original capital going into a flip now.

CPA did TY2022 partnership return in March 2023 which included two separate K-1s for my spouse and I splitting the losses (~$2111 each).  We filed a Joint Federal Return in April, plus State returns in Indiana and LLC one for Illinois.

Tax forms for LLC return:

8879-E File, Form 1065, Form 1065 Schedule B, Form 1065 Schedule K, L, M-1, M-2, Schedule K-1 Form 1065 for Husband and separate one for wife, Schedule B-1 Form 1065, Partners Basis Statement 1065 for Husband and separate one for wife.  

Joint Tax Return-
1040, Schedule 1, Schedule 2, Schedule 3, Schedule A, Schedule E, Form 4952, Form 8889 -Husband individual HSA, Form 8889 -Wife individual HSA
Form 8959 Addition Medicare Tax (Wife), Form 8283 Charity, Form 8582 Passive Activity Loss Limitations (all Zeros since no property was in service yet)

Quote from @Michael Plaks:

@Daniel Schiff

The way we read your post on taxes is the same way you would read our posts on IT. ;) As in - you're asking questions about a specific higher-level issue while missing the basics.

So, basics first. Your extra taxable income is $80-100k, not $40k. It does not matter what you pull out and what you reinvest, you're taxed on the entire amount that the LLC made. (Unless your LLC elected to be treated as a C-corporation, which is highly unlikely.) Also, flips are not eligible for 1031 exchanges, so it's not an option.

To your specific question, you're apparently in Indiana. In Indiana, husband-wife LLCs are required to file as partnerships. You probably cannot allocate your income (and, with it, SE tax) other than 50/50, however you may be able to achieve your desired result via a "guaranteed payments" system. A real answer requires examining your LLC operating agreement and the actual facts of your operation. Not doable in an online forum, takes an actual consultation with a tax professional.

If I 1031 exchange the balance within the LLC doesn't that reduce my taxable amount to the $40k I propose removing from the LLC as personal income. (Ie defer the balance until a future date for taxation).

I am in Indiana and our LLC is an Illinois Series capable one. I reviewed  our operating agreement and it does state distributions would be paid out equally- so I believe I have the answer.

This has been a useful thought exercise for my planning purposes for 2024. I do have a CPA and attorney for compliance and will meet in the coming month for my 2023 taxes. I know better what questions to ask in that meeting- and to have the operating agreement in hand for that discussion, thank you.

My spouse and I have a real estate pass thru LLC we are 50:50 partners / owners of. We are in the middle of a flip which will sell in 2024 and have a second one lined up. Estimate to make 80-100k from both deals. For 2023 we both had W-2 earnings where my spouse (Pharmacist) exceeded the social security earnings threshold and will do so again in 2024. I'm an IT Director and am just under the threshold in 2023 and will be also be under by in 2024. If after the flips we pull $40k out and reinvest the remaining profits with our original capital, do we get to choose which member to allocate the $40k income to avoid self employment tax on my remaining cap, or would it split and I pay self employment tax for both social security and Medicare and my spouse only pays the Medicare tax? I don't mind maxing out my Social security - but it really won't push my eventual benefits up much so I'd prefer to keep the cash. We do take advantage of deductions- maxing out both 401ks, HSAs in 2023 and itemizing deductions and will do so in 2024 - so we fall at the lower end of the 24% federal bracket (MAGI of $240-260k- so additional ordinary income is 24% income tax plus whatever Medicare/Social security we must pay on the $40k
I know I can retain all the earnings in the LLCand 1031 exchange until we no longer have W-2 wages to reduce our taxes, but I plan on using the $40k for a personal home improvement - replace two HVAC systems and install a new wood deck and landscaping). Any info on the SE tax split is appreciated- I could t find any specifics to splitting between married members with w-2 earnings.

Option 3- which is about $135k down and leaves you roughly $225k cash ($300k was 80% of your reserves so I am assuming $360k cash on hand) Keep your powder dry and take the option to use other people’s money as long as the deal really does cash flow for you and pay for itself. Make sure to do due diligence on the property and cash flow- 1-2 years bank statements and receipts / cancelled checks. Confirm the application process that was used and credit worthiness of tenants; ensure they have solid income/careers to ensure their work/industry doesn’t put your cash flow at risk.  make sure to know how long that cash flow is in place before needing to rent or renew, and if any capital investments are looming (roof, HVAC, etc) that would detract from you cash flow and success. IE get proof your rent will be stable and remain in place and not become a maintenance money pit.  Your cash reserve will ensure you can ride out any uncertainty if the market or economy sours, and if fed reduces rates in next 2 years you can refinance to a clean, lower rate loan.

With you cash you will have flexibility for other RE and not be 80% tied to one property.

DUE DILLIGENCE is your key here (act as if you are an underwriter and eliminate risks). Without provable facts walk away.

Just a quick comment on the Self Employment tax- you indicated your flip profit and income would take you over 200k- but you didn’t state filing status.  You may be over the SE threshold and not have to worry about it additional OASDI just Medicare.

My spouse and I are employed W-2 workers - she exceeds the cap and I am $6000 from doing so. We do 2 properties a year 1 flip a year and 1 to hold for rental (essentially the flip replenishes our equity / capital to hold the rental when refinancing out).  Once I take the flip profit into account we both will have phased out the 12.4% social security portion of the SE tax.  Don't be afraid of a SE tax if w-2 employed- be thankful you made that much and boosted your yearly social security earnings- but it will likely not bite you to the tune of $15k in extra tax on a $100k profit.  Especially if you are up the tax (bracket) ladder (amounts depend on filing status). For single it phases out in the 24% bracket and married filing jointly in the 22% bracket.  

Medicare never phases out and increases 0.9% after a certain level.

Netting it out if you make $125k W-2, and $100k PROFIT after all expenses on a flip-  You’ll pay 15.3% on the first $35.2k of the flip, the 2.9% on the next $39.8k then 3.8% on the last $25k 

Total SE tax = $5385 + $1154 + $950 = $7489

Plus income taxes in your bracket (ladder) are 22 or 24%  say $22,000 

in total from your $100k profit your taxes are $29489 and you retain $70511

You’ll see the benefit if you pull your annual social security statement when it caps out and the boost years of hitting the cap can have on your social security.

You also can chop down the bracket you’re in by maximizing your 401k contributions on w-2 income -talk to a tax planner to ensure you maximize those opportunities.

The self-employment tax rate for 2023

As noted, the self-employment tax rate is 15.3% of net earnings in 2023. That rate is the sum of a 12.4% Social Security tax (also known as OASDI tax) and a 2.9% Medicare tax on net earnings. Self-employment tax is not the same as income tax.

• For the 2023 tax year, the first $160,200 of earnings is subject to the Social Security portion. This is up from $147,000 in 2022.
• A 0.9% additional Medicare tax may also apply if your net earnings from self-employment exceed $200,000 if you’re a single filer or $250,000 if you’re filing jointly.

The self-employment tax rate for 2024

For 2024, the first $168,600 of earnings is subject to the Social Security portion (up from $160,200 in 2023). The self-employment tax rate for 2024 remains 15.3% of net earnings.

https://www.nerdwallet.com/article/taxes/self-employment-tax#:~:text=The%20self%2Demployment%20tax%20rate%20for%202024,up%20from%20%24160%2C200%20in%202023).