All Forum Posts by: Frank Chin

 Since I don't know anything about your stepmom's estate, it's size, her objectives, you can check with an estate attorney about "irrevocable trusts" where you'll be the beneficiary. Another way is doing gifting using either the annual gift limits or lifetime gift limit, which is currently over $12 million dollars. 

The advantage of irrevocable trust is it puts you in control of the property during her lifetime, and on death, you'll inherit it on a stepped-up basis, potentially saving you on a ton of taxes. We done estate planning for our mother-in-law, and she gifted the property to us so she will not be wiped out by future unforeseen medical expenses. You guys should discuss matters with an estate attorney to decide what the best approach is, depending on the size of the anticipated gift, the size of the estate, and your final goals.

I owned several small properties for nearly 40 years have not issued 1099 to any one yet. I used the same CPA for the past 25 years, checked with him time to time and has not been requested I do it. I have checked various times through the years, and found that I am still not required to do so under: Small landlord exception My CPA advised me of changes in tax laws, but did not mention anything about the exception.

I was in charge of bookkeeping for a non-profit and issued 1099's. I had contractors we used fill out W9's for our files. Most of them are Corporate entities where W9's are not required, and 2 entities are LLC's where we have to inquire whether they file taxes as corporations.

Problems which we ran into are the 1099's are for "labor", not for sales of goods and service, and I have to get contractors that are not corporate entities to give us separate invoices, though I got into arguments with one or two over them.

I was on the receiving end of an IRS inquiry when I was in the IT business, submitted a bill for the sale of computers and IT work of over $20K. Customer issued a 1099 for the entire invoice, and the IRS sent me a notice that the income did not show up on my tax return. Took me a day of work to research my files and explain to the IRS that only $3K of the bill is for my consulting, which was reported, and the rest is the sale of equipment, reported separately, with the associated COGS. I didn't break the bill up as I assume my client won't be issuing a 1099 as I am a S Corp. The IRS agreed with me and asked the company to issue a corrected 1099 which they didn't.

I used the same contractors over the years for my REI, and they are all incorporated so I didn't have to use the small landlord exception. From time to time, I used handyman, and they fall into the under $600 exception. Also, payment through credit cards, Vemno etc. is also does not require 1099's.

Based on my work and experience with 1099's, for small landlords, you're better off not doing it than doing it.

California does not have an inheritance tax. There is a lifetime a gift and estate tax exemption on the federal level that is currently $12.06 million. If the total estate is less than the exemption, there is no estate taxes due. Our mother-in-law died three years ago, my wife and her sister inherited a co-op, mortgage free, we sold it, and there is no estate tax due. However, our MIL had my wife's sister on the deed, as 50% owner when they bought it, so my sister-in-law had to pay capital gains tax based the date of purchase, though she never lived there, while my wife inherited her half without any capital or inheritance taxes due since her capital gains is on a stepped-up basis.
  

My sister-in-law was shocked at it, as our mom-in-law included her daughter on the deed as a good will gesture not realizing the estate consequences. None the less, it's quite a few dollars even paying the taxes, though it's better to get it tax free.

@Robert Sims

Request the company check be certified, i.e. payment via a certified company check.

@Ling Lin

I have invested in tech stocks for nearly 40 years. We have several accounts, including IRA's, and tech stocks can go down 60% one year, and bounced back even more the following years. The key is if the company is good, just sit on the downturn, sit tight and you'll be OK. But make sure you have a portfolio of conservative investments to balance things out.

I have seen downturns in the real estate market and tech markets. Those unfortunate enough to start right before downturns usually pull out, never go back in again. I bought a triplex for $150K in 1983, skyrocketed to $350K in 1986. The downturn started in 1986, someone who bought the triplex next to me, watch the value drop to $300K in 1990, got nervous, sold it, and the guy who bought it for $300K got even more nervous, sold it for under $275K in 1992. The values bounced back, I sat on mine, and by 2006, similar properties sold for $800K. Currently, they are worth $1.4 million.

Same story with tech stocks. I bought some Microsoft stock in the early 90's, 2 stock splits bought it to 1,000 shares, sitting in one portfolio all these years. I decided to just sit on it. Back then, I only put down around $7,000 total. MSFT was up to $349/share a few months ago, and is currently down to $271/share. That's a fluctuation between $271K and $349K in the portfolio. Should I go crazy because of the recent drop. I sit tight as MSFT is forecasted to hit $375 to $411 a share in the coming year.

So if you invest in real estate or tech stocks, be ready for these gyrations. Unfortunately, I saw too many investors get nervous, and just sell. BTW, I thought of taking profits from MSFT when it reached $120/share, after it jumped from $59/share to $80/share to $120/share over a 3 year period, but stopped myself, and I'm glad I did.

I use a service called "ClearNow" which handles my electronic rent payments. The tenant can opt in to have the payment record reported to the credit bureau. See: ClearNow credit reporting

In my area, NYC area, attorneys advised me for small businesses, LLC won't do you much good, especially if you personally run it. Reason is you'll be personally sued along with the LLC usually for reasons of personal negligence if bad things happen.

I bought a business some years back, which was in an S Corp. The owner got $1 million liability insurance for the S Corp, but not for himself personally. There was an accident, he along with the S Corp was sued for $3 million.

Since he'll be personally on the hook for $2 million, his attorney tried to have the suit against him personally dismissed since it's in an S Corp. It was denied. The insurance company advised him he should get his own attorney since the attorney they have only represent the insurance company.

I bought the business via an LLC and was advised to get insurance for both me personally and the LLC as I'll be sued personally as well by default. Reason for the LLC is not for liability reasons, but for other business reasons as I have employees and having the business in a different entity would simplify things for tax and insurance reasons, particularly workmen's comp.

The advice I got is get enough good umbrella insurance for the first few properties. I'll be sued personally anyway even if there's an LLC.

I started investing in the NYC area beginning in 1983 after following the market from 1971 when I graduated college. Got interested because my dad bought a mixed-use property in 1963 for $25K and it tripled in value by 1972 to $75K.

I started my investing with duplexes and triplexes in 1982. From 1972 to 1982, they tripled in value from $75K to over $200 -$225K. Fortunately, owners and investor was unaware of the quick rise in prices, got confused, that you can get undervalued properties. The first property I got for $150K has an ARV of $200K in 1983. The second property I got for $180K in 1984 has an ARV well over $225K. The trick here is I kept looking and find flukes. The second property I got was listed with the wrong price, advertised by the realtor. The realtor staff got confused as the broker promised to get $180K for the buyer after commission and expenses, not listing it for $180K. I made an offer around $180K but was rejected. I kept checking back, every week, and they were still trying to find a buyer, for months, and several months later decided to take my offer if I raised it by $5,000, so the broker can make a commission. There was a contract signing, an argument broke out and my wife decided to leave. The broker chased after us and begged "ok, I'll take $2,000 commission on this deal if you go through with it, and it's better than nothing for me".

Finally, I invested over 25% to 30% cash as the interest rates in 1983 ran 13% to 14%. I lived in the first triplex, rent free, with the tenants covering the mortgage. I made several hundred a month on the second property. When interest rates dropped to the 7% to 8% level by 1993, i refinanced, from 13.5% to 7.5% and because of DTI issues, kept the mortgages the same amount, and was able to live rent free and have cash flow of close to $2,000, including another SFR I got. My wife quit her job.

All in all, I did OK. Other investors gambled, overpaid, negatively cash flowed, and got wiped out. The market tanked in 1986, and people who got in at that point got wiped out. The triplex next to my triplex that I got in 1983 for $150K was sold in 1986 to a flipper for $350K and he put the property on the market for $399K. By 1990, he lost money for 3 years, can't make his payments and sold it for $300K. He lost over $100K. The guy who bought it for $300K sold it 3 years later at $275K also negatively cash flowed and lost another 100K.

Answering your question, 1973 to 1982 everyone did OK, prices tripled. Problem was mortgage rates hit historic levels in the 80's up to 18%. From 1986 to 1993, not so good. The market recovered till it reached its next peak in 2006. Triplexes in 2006 went for $800K, for a short while dropping to $600K here in NYC a year later.

@Monique Bjork I've been a real estate investor for 40 years, and ran into such contractors, paid in cash, been failed to issue receipts. Fortunately, only a few times. I also worked in accounting, and I document this situation in a memo to myself, in place of contractor invoice, his name, phone number, what he did, requests for a receipt, and keep it on file. In the case of an IRS audit, since I have receipts for everything else, except for this one guy, even if they deny the deduction, I don't have a real problem.

Of course, the answer is you issue a 1099 to the contractor if you have his EIN#. However, in my research over the years, RE investors are not usually required to issue 1099's. See: 1099 requirements

Also, I used the same CPA of many years, and though I'm in the accounting field, my deal with him is for my fee, he is to handle any IRS audits, and advise me of all requirements. And you are not required to issue 1099's to a corporate entity in any case. 

I only encountered one IRS audit so far, not for my real estate activities, but for my IT business in a S Corp, a billing for some $5,000. I bought and installed a PC for a small business, installed software, which at the time cost me $3,500, making a $1,500 profit. I knew the company should not 1099 me because the owner is a CPA, knew I'm a corporate entity and yelled to his bookkeeper, "make sure you don't 1099 this one". Well, they somehow did.

The IRS sent me a letter saying they didn't see the $5,000 income in my tax return. My client mistake cost me 2 days of searching out my records from 2 years before, submitting the P&L again for my S Corp, the K1's, the purchases of computers and software for that job, all the files that relates to the $5,000 billing. I called my client and told him that because he sent out an unnecessary 1099, it cost me 2 days of work to dig out all the records from 2 years before.

In your situation, just keep a memo on file. The IRS sent me back a letter saying everything is OK. I sent them a stack of papers 6 inches thick and I'm not sure they even went through it all for $5000.

You need to engage an architect who is familiar with the building codes and zoning requirements of your area. Have a review done before hiring contractors thru Angi. I bought properties with such basements and finished basement units that's in violation of codes, and some years ago, got an architect to do a quick walkthrough with a fixed charge of $150.00. Some architects are also expeditors whose function is to know what permits need to be done, and file it for you.