All Forum Posts by: Dillon Kenniston

REWealth helps real estate investors maximize lifetime returns and minimize lifetime taxes through comprehensive financial planning.

We are:

* Fee-only (we don't sell financial products: mutual funds, annuities, insurance, etc.)

* Independent (we don't work for some larger broker or wirehouse whose products we're supposed to sell)

* Fiduciary (we're legally and ethically required to put your best interests first in all recommendations)

Book a today and see if REWealth is a fit for you!

(We do not provide legal or tax preparation services. We DO work with your CPA and attorney[s] to craft strategies tailored to your unique circumstances.)

Hey @Eric Samuels, great question!

Your instincts are good. As a financial planner, I generally recommend clients build up a personal emergency reserve before investing. (A good rule of thumb is: at least 6 months' worth of expenses for single-income households and 3 months' worth of expenses for dual-income households.) In my view, it'd also be wise to have emergency reserves available for your duplex as well, separate from your personal reserves.

Roth IRAs are great tools for investing, assuming you qualify to do so based on earned income thresholds. (And if not, there are workarounds.) 

Some may suggest contributing to the Roth IRA immediately regardless of a bank account emergency fund on the grounds that Roth IRA contributions can be taken out tax- and penalty-free. But I don't suggest this because a) earnings would still incur early withdrawal penalties, so it complicates things, and b) this is not what Roth IRAs are for.

To summarize:

1. Cash reserve for family & duplex + finish needed maintenance

2. Contribute to the Roth IRA and invest

There may be other, better steps in between, depending on benefits available through your employer (ie, if you're healthy, is a High Deductible Health Plan/HSA available?). But given the facts as stated: No, not dumb. 

Keep crushing it!

Hi @Shaun Ng, thanks for reaching out!

In general, I recommend fee-only, fiduciary CFP® Professionals - then, within that group, you can filter by those who specialize in real estate in general and exit strategies in particular. Those of us who serve the real estate investor community are something of a minority among financial advisors, but we do exist!

BiggerPockets recently released a tool to help real estate investors find an advisor, which you can check out here. It's worth taking a look and talking to a few advisors to see who's a fit for you.

FeeOnlyNetwork and XY Planning Network also have great tools for finding an advisor, though those will be bigger pools of advisors who may or may not specialize in working with real estate investors. But on many of these tools, you should be able to search by real estate as a specialty.

Happy to touch base separately if I can answer any followup questions. I could also offer a handful of questions you might ask when interviewing an advisor. Cheers!

Hi @Allyson Mitchell! Super common question among folks who really know their stuff financially. And, worth considering: Even the best athletes hire coaches!

In general, when folks ask for recommendations for a financial planner, I recommend fee-only, fiduciary CFP® Professionals that specializes in working with real estate investors. Those of us who serve the real estate investor community are something of a minority among financial advisors. But we do exist!

BiggerPockets recently released a tool to help real estate investors find an advisor, which you can check out here. It's worth talking to a few folks to see who's a great fit for you. FeeOnlyNetwork and XY Planning Network also have great tools for finding an advisor, though those will be bigger pools of advisors who may or may not specialize in working with  real estate investors.

Happy to touch base separately if I can answer any followup questions. Cheers!

Hi @Jill Jay! In general, when folks ask for recommendations for a financial planner, I recommend fee-only, fiduciary CFP® Professionals that specializes in working with real estate investors. As @Jonathan Bock rightly notes, those of us who serve the real estate investor community are something of a minority among financial advisors. But we do exist! Happy to touch base separately if I can answer any followup questions.

PS @Jonathan Bock - Absolutely stoked for the March release!

Hi @Sandy K., great question. The short answer is Yes, there are some who "oversee" all investments. The longer answer is below :)

The answer depends on what's meant by "oversee". Most fiduciary, fee-only CERTIFIED FINANCIAL PLANNERs™ will help you make a plan for all of your assets, but may not want to or be able to manage your assets. (For example, it's rare that a Registered Investment Advisor would also be a property manager.) Your question also refers to "financial consultants", which I believe is a bit of a wild west term: anyone could call themselves that with little to no qualification needed or enforced. So, once you start getting into professional designations and investment management, the language becomes more technical. But sheesh - what a nightmare of alphabet soup for folks to navigate!

If by "oversee" you mean to include management, then there's regulation requiring anyone who holds themselves out as an Investment Advisor to register either with state(s) or the SEC (basically, anyone who 1) gives advice on securities, 2) said advice is given as part of a regular business, and 3) receives compensation for the advice). This may end up excluding many who call themselves financial consultants or coaches, and leave you with RIAs (Registered Investment Advisors).

Of those who will manage your investable assets (529s, IRAs, sometimes 401ks, etc.), they'll typically have what's called "discretion" over your assets, meaning they're able to buy and sell securities for you as they deem fit, in alignment with your Investor Policy Statement - meaning, they manage your investments in alignment with your goals, time horizon, and risk tolerance. Firms that manage assets will normally also handle portfolio monitoring and operational responsibilities such as rebalancing, tax-loss harvesting, etc. 

In our case at REWealth, we're able to manage most all security/investable assets (529s, Roth IRA, taxable brokerage, etc., and starting next month, also 401ks and most employer-sponsored accounts). For everything else (like real estate and crypto), we work alongside clients to come up with a plan for and help them manage whatever we don't manage directly. We specialize in working with real estate investors. And for that reason, we don't require that we manage investable assets directly; the real value is in the financial plan: how to optimize one's entire financial life, assets and liabilities, cashflow, insurance planning, estate planning, tax planning, etc. This planning service does include Investment planning (asset allocation/location and more), and we help implement all recommendations. But it's not us doing the actual trade execution/direct management. For someone who just wants to offload investment management completely, including execution, that, for us, is available as a separate, optional service; it's for investors who just don't want to have to think about doing asset (al)location or rebalancing; they just want updates on how their investments are doing and what we're doing to align those investments with their goals.

Sorry for the long-ish answer. I do hope that helps!

One parting thought: If you're in the market for a financial planner/advisor/consultant, the three most important questions to ask them - and I'd give my own mother the same advice - are: 1) Who do you work for? (Ideally, Independent), 2) How do you get paid? (Ideally, fee-only), and 3) Are you a fiduciary at all times? (Ideally, yes).

Hey @Account Closed, congratulations on selling your home and the influx of cash! A few thoughts:

1. Given this was your home (ie, principal residence), and as long as you've lived in your home for 2 of the last 5 years, your sale is likely eligible for the Section 121 exclusion, meaning $250k in gain excluded from taxable income (or up to $500k in gain if married and filing jointly). I'm not sure what your specific numbers look like, but if your gain is within those bounds, taxes should be minimal.

2. I see the $50k you're setting aside within 18 months is for a new home purchase. While no one has a crystal ball, consider whether that amount is right for a downpayment for your family given the new area, home price ranges (which may continue to appreciate, especially if rates come down in 2024), and the resulting expected monthly payments on a new mortgage. $50k might be the right amount, but if you haven't already projected monthly P&I on the new home at $50k down, I'd recommend doing so before committing remainder to investments.

3. For reinvesting, given you're not a fan of the stock market and are looking for more conservative options with $50k liquidity available within 18 months, you might consider CDs or high-yield savings accounts for the downpayment (which I wouldn't have suggested a few years back, but now, some 1-year CD payouts are commensurate with iBonds [5.27% through April 2024] and with fewer restrictions). High-yield savings accounts are always good for near-term planned expenses, and some of those offer rates in the low-to-mid 4%'s. You could also explore fixed income mutual funds or ETFs, but these may lose principal.

For the balance, consider that 10-12 years is a long enough time horizon that fixed income instruments - bonds, CDs, or debt funds - are subject to inflation risk. Even if principal is safe with certain instruments, purchasing power may not be. (Or if purchasing power is preserved, your real, inflation-adjusted return will be lower than what might be advertised.) Some investors like bond ladders. Or, real estate is a fine asset class and historically has been a solid hedge against inflation. Or, you might take a more "active" investing strategy by looking at sectors, which can be good, especially if you've got a finger on the pulse for market trends. (I share Chris's view that the energy sector looks good and may outperform RE.)

I'd advise caution when someone suggests you use the balance to buy cash-value life insurance or an annuity. These are fine products in certain circumstances, possibly including yours; I don't know enough about your situation to say either way. But be aware that not all financial advisors are fiduciaries and whoever commends these products may be trying to sell you something. Which, again, isn't necessarily bad; just something to be aware of.

Truth is, we don't know what tomorrow will bring, but many of the above are fine options. My only word of encouragement would be to embrace some volatility over the coming decade for the longer-term opportunities it can afford. If I can be of service, please don't hesitate to reach out directly!

Hi @Ricardo Diaz, great question. As you point out, this is a tricky tax question, so I'd definitely recommend consulting with a real-estate savvy CPA before taking any action.

I'm a CERTIFIED FINANCIAL PLANNER™, not a CPA. Our service model includes tax planning, but we always encourage working alongside other professionals (CPAs, attorneys) to ensure that strategies are executed with all t's crossed and i's dotted. (So please do not take what follows as a recommendation for your specific situation. This is not advice; it's general info.)

That said, here's an opening shot:

1. "I refinanced an investment house into a two partner llc which I am one member. We received money and sits in bank account. I took some money out and find out I will pay taxes on it." I assume that the money you say you've received, from which you're taking a draw, is from the refinance, correct? If so, then in general, my understanding is that this would constitute borrowed money, and is therefore not taxed. Cash from a cash-out refinance may be taxed when a distribution is in excess of your basis (ie, You put $100k into a $1m syndication to purchase a $10m property. That property appreciates to $20m, the syndication refinances the property, pays off the previous loan, and distributes cash from the proceeds, and you get back more than the $100k you put in. The excess above your $100k basis could be taxable as gain. But the original debt, the $100k, is usually not.) Some may argue that the cash from an LLC cash-out refi is taxable on the grounds that you have to take the money out as an owner draw. But my understanding is that's not the case with a property refinance (again, unless in excess of basis [in which case, taxed as gain], or unless your lender forgives the loan [in which case, taxed as income]). To summarize: I can't say anything for certain without knowing details about your specific situation. But on the grounds of the 80/20 rule, I'd question the premise; make sure you really will have to pay taxes on it.

2. "Now I will be selling the house and dissolving the llc. now what is the best way or creative way to have that money and the money from the sale and not get taxed hard or not at all. Can I roll that into another llc for a future investment. ????" Here, we transition from refinance proceeds to taxation of a property sale. In general, the two biggest hits (besides commissions) are usually capital gains and depreciation recapture, neither of which are directly implicated through a refinance. There's no information provided about basis or depreciation, so I'll just say that the most common option for tax deferral on property sale would be a 1031 exchange. (Note that 1031 exchanges must not only be for like-kind assets, but must also be done by the same tax payer - or here, within the same entity. So if you choose the 1031 route, you may want to keep the LLC active. Note also that there are more passive options that are 1031-eligible such as Delaware Statutory Trusts if the real issue is you're looking to get out of property management.)

Another option might be a 721 UPREIT exchange. The idea here is to defer capital gains from property sale. It's similar to a 1031 exchange, but there are differences. For one, you're not exchanging real property for real property, but rather, real property for shares in a REIT. Also, 721 exchanges are "final" in the sense that, unlike with 1031 where you can 1031 property after property, with a 721, there's no need for additional future exchanges: you've basically pushed the capital gains deferral to its limit. But the benefit is you've deferred gains and are now into a more passive investment. (Just remember REITs can lose value. They can usually be sold more easily than real property, but this may trigger a taxable event and shares may be sold at a discount.)

You suggest that the sum of money you'd be paying taxes on is quite large. If so, and if the property is highly appreciated, and if you have the means of paying off the debt before selling the property, another option to explore might be a deferred sales trust. I believe deferred sales trusts will still recognize depreciation recapture in the year of sale, but this strategy would allow you to truly divest from the property while getting installment sale treatment for capital gains (which in theory could be deferred "indefinitely"; on this model, interest and dividends could be paid out but principal retained until you're ready to recognize capital gains over time). A key difference between a deferred sales trust and a 721 UPREIT exchange is that the deferred sales trust preserves flexibility in how proceeds are ultimately reinvested. These can be expensive to set up, though, so you'd want to make sure the juice is worth the squeeze.

How these various strategies interact with a multi-member LLC will depend on your LLC's operating agreement, state law, and other considerations. (For example, suppose you executed a 721 UPREIT exchange: would your LLC allow the other member to "buy out" the value of their shares before dissolving the entity?) It's impossible to tell without knowing a lot more detail and having an attorney's input.

I hope the above provides food for thought. Again, this post is for educational purposes only and does not constitute advice. Here are some key players I'd recommend having on your team before making a final decision on the best path forward for you:

* Your financial advisor - ideally a fiduciary, fee-only CFP Professional who works with real estate investors

* Your CPA - ideally real estate-savvy

* A Qualified Intermediary (to help you assess whether a 1031 might make sense; again, there are more passive 1031-eligible options)

* An attorney - ideally, one who can help advise on different kinds of trusts and the implications for each

Cheers!

Hey there @Mackal Smith! It sounds like you have two main goals: to 1) generate an income stream while keeping taxes manageable, and 2) develop an estate plan that equips your wife with lasting income while simplifying the picture. Fair summary? If so:

How best to accomplish #1 will depend on several factors, and it's always risky to recommend anything without knowing the full picture. (If we were discussing face-to-face, I'd want to understand the "why" behind divesting a bit better, since there may be ways of generating income more passively without divesting.) So, high-level, it sounds like it'd be worth doing a side-by-side analysis on whether a Deferred Sales Trust or a 1031 to Delaware Statutory Trust makes most sense. Both have the potential of deferring capital gains "indefinitely" and both will likely provide commensurate income. A Delaware Statutory Trust will be more restrictive in terms of new investment vehicles, but also has the benefit of deferring depreciation recapture. (I believe a Deferred Sales Trust will still recognize depreciation recapture in year of sale, but someone can absolutely correct me if needed.) Likewise, with a Deferred Sales Trust, capital gains are deferred, but still paid if/when principal payments are distributed from the trust. (And since a sale has occurred, there's no step-up in basis to be had. This is one of the benefits of holding real property: at death, your wife could sell with a stepped up basis and get a lump sum while avoiding capital gains and depreciation recapture. A Delaware Statutory Trust preserves this benefit.) Not sure which would make most sense for you; just options & factors to consider.

#2 would require more strategic discussions with your financial advisor and (ideally) an estate planning attorney about how you'd want income for your wife structured. This can get complicated quickly because of how many moving pieces there are (such as property titling: if to your businesses, then what business ownership looks like; what you'd like to happen after your wife passes; whether you think you might breach the federal estate tax exemption amount [$13.61m per individual for 2024] and more broadly, whether or not you should use the marital deduction; whether you're in a second marriage; whether there are kids from a previous marriage; etc.). Much of the financial side of estate planning done by a CFP or other fiduciary advisor has to do with estate tax planning, which generally becomes relevant if you expect your gross estate to exceed exemption amounts. (That's usually when we go from discussing revocable living trusts more broadly to discussing things like QTIPs, General Power of Appointment trusts, and Bypass trusts - all, of course, alongside your estate planning attorney. We look at these and don't assume spousal exemption portability because portability may be forfeited in cases of remarriage.) 

But here are a few high-level factors to consider:

1) Are the properties held in multiple states? If so, watch out for ancillary (multi-state) probate. (Having a will is necessary but usually not sufficient since a will won't, by itself, avoid probate.) It's common to put properties into a revocable living trust for this reason (avoids probate while preserving step-up in basis). Even if you use a different trust structure - there's several to choose from - 99.9/100 times, if you own property in multiple states, you don't want to own them in your own name, and usually want them in some sort of trust. 

2) LLC ownership interests can be put into trusts as well, but as you hinted, things can get a bit more complicated, especially when there are loans on LLC assets held in trust. (It sounds like your idea about getting the properties owned by your businesses to "free-and-clear" might help simplify things here. But an estate planning attorney can help steer you in the right direction.)

3) Are you and your wife charitably-inclined? There are certain kinds of charitable trusts that lend themselves to income streams for your wife once you've passed, give you tax benefits today, all while leaving remainder interests to charity-of-choice.

There are other strategies (Family Limited Partnerships, Spousal Lifetime Access Trusts, etc.) that come available if you were open to holding properties for longer (ie, offload to a trusted  property manager). But assuming divestment, the above might be some options.

One last note: @Daniel Johnson hit the nail on the head above. I'm also an XYPN member who specializes in working with Real Estate Investors and he's 100% right: there's not a ton of us out there. To your point, fee-only advisors who earn a living strictly on an AUM model may not work with RE investors because RE investors have a significant portion of net worth tied up in assets the advisor can't manage (plus, it's a financial planning niche, and the rabbit hole goes deep). So, too often, the first advice given to real estate investors is: "Stop investing in real estate; instead, liquidate your properties and invest the proceeds with me; here's a lovely bond ladder!" And the kicker if they're not fee-only: "And by the way, you look like you might need another annuity." But, independent, fee-only, fiduciary advisors who work with RE investors do exist, as Daniel and I can testify! And both XYPN and NAPFA are great places to find fee-only, fiduciary advice more broadly.

Apologies for the novel. Cheers, and best wishes! Don't hesitate to reach out if I can be of service. 

And, disclosure: All of the above is for educational purposes only, does not constitute investment advice, no decisions should be made solely on the above, and you should consult with other professionals to validate which of the above strategies is best for you :)

Hi there @Jonathan Peters! Would be happy to connect to learn more about your circumstances. I'm a CFP Professional that specializes in working with real estate investors (based out of PA, but a virtual practice). You can find more info on our website. Feel free to check us out and book a meeting if it looks like it might be a fit! Cheers