All Forum Posts by: John Briggs

I've never seen a "flipper" get capital gains treatment on their property.  I'm interested to know what that looks like.

My clients who both "flip" and "hold" have two entities.  One for the flipping and one for the holding.  The strategy when implemented correctly is a thing of beauty.  

@Brian Burke , are you referring to cost segregation on the larger deals?

An s corp is either a c corp that made an s election or an LLC that made an s election.

The c corp pays taxes as an entity. The S corp and LLC both pass the tax burden to the individual. So those entities don't pay income taxes. You pay income taxes based on your individual tax rate.

If the colleges don't look at c corps that you own for purposes of the FAFSA than it sounds like that is a good plan for the next 10 years.  Especially if you are showing no profits.  Then you would deal with the capital gain hit in 10 years.  

If I put myself in your shoes and had to make this decision, I would compare the amount of grants (free money) I would be getting from FAFSA for each of my kids over the 10 years and see what kind of tax burden of the capital gain hit in 10 years.  It very may be worth it to do this strategy for you.  

Paying capital gains in 10 years isn't the end of the world.  It does increase your basis in the property which means more depreciation.  It's just that if your strategy is to hold the properties forever, then you would have never paid the capital gains rates.  

I'm a CPA and I can tell you if you ask 10 of us the same question, you'll get 15 different answers.  

I'm not familiar with FAFSA and how they look at income. But hopefully I can give you info that won't cause more confusion.

In most cases, holding rental property in a c corp is not a good idea because of how the IRS handles title transfers and dissolution of the entity.  Anytime you transfer title out of the business name (usually for refinancing purposes), the IRS makes you pretend that you actually sold the property at market value.  This means the C corp would now get to pay capital gains on that sale even though you were just refinaning.   

In the case of dissolving the business, you have to do the same phantom sale, which means the capital gains you have to pay is higher than what it normally would be.  

This is the same scenario for S corps.  The confusion with S corps is that you always have to make an IRS election to tax it as an s corp.  So you can have a corp or an llc and elect to have it taxed as an s corp.  

An LLC is the common entity used to hold long term real estate. From a tax perspective whether you are operating as a sole proprietor,LLC owned by one person (commonly called single member LLC), or LLC owned by two or more people, your tax consequence is exactly the same. The LLC is there for liability protection.

If you had 100k or more of rental income in a c corp, that would be costly to tap into.  You can either pay it to yourself in a wage (so you pay your personal income tax rate on it plus payroll tax) or you can distribute a dividend to yourself where you still pay tax on it.  If you pay a dividend, the corporation still pays income tax on it.  So corporate tax rate plus dividend tax rate = no good.  

I would only hold real estate in a c corp if I knew I could keep corporate profit to darn close to zero.  But if that helps you qualify for FAFSA, it may be a worthwhile strategy.  

I'm a CPA.  I'm working with one of my clients right now that has a N/P. He is trying to provide housing for people after their court ordered half way house period is up.  The issue we are dealing with is finding a city that has the proper zone that will allow him to build an apartment complex.  @Glenn McCrorey is right that house can be exempt.  But in my experience here, the county would only give him exemption if the apartment complex brought in some sort of revenue to the city.  

On another N/P note, keep in mind while it can be a powerful strategy, you need to know the limitations.  Once a N/P owns an asset, it can never be "sold" out of the N/P.  I'm not saying you can't sell the property.  You certianly can.  But the proceeds from the sale stay within the N/P.  If you want to dissolve the N/P, the assets have to be transferred to another 501c3 qualified.  Nonprofits don't have shareholders or owners and they can't be organized to financially benefit its members, officers, or directors.  However, reasonable salaries and expense reimbursements are permitted.  

It has been my experience with IRS auditors that if you do more than 2 flips per year, they consider you a dealer. Which means they look at each of your properties as inventory. Very different from holding a real estate property. When your properties are considered inventory, every dollar put into the property is "capitalized" which means you only get the tax benefit of those dollars when you sell the property. This also makes the income considered ordinary income (subject to 15.3 self employment tax) which is also different than the normal passive income status of rental actitivies.

If you talk to 10 CPAs, you'll get 15 different answers. :)

All my tax clients that do more than 2 flips per year use an S-Corp because the S corp can help you minimize self employment tax.

I have a tax client that desperately needs a trustworthy property manager for a property he has in Kansas City Missouri. Any referrals biggerpockets can provide would be greatly appreciated.

@Pam Shifflette,

I'm not sure this well help, but I was just ready @Dave Van Horn's blog yesterday and he had a previous post that spoke about a rental he did for recovering addicts. Based on what his post said, I am assuming (and I know what it means to assume but I'm doing it anyway :)) that special needs would be considered disabled making them a protected class. If that is true, then I don't think zoning would be an issue.

http://www.biggerpockets.com/blogs/2872/blog_posts/24535-my-most-rewarding-rental

You have a lot of good answers here as for receipt management. The bottom line is you need to pick something you are going to use and is easy enough for you to want to continue to use it. I also wanted to point out that the one of the main reason's one would keep receipts is to protect your deductions should you be selected for the pleasant experience of being audited. So while you didn't ask this question specifically, I also wanted to point out that if you are writing checks in your business, you want to keep a copy of the cleared check image. In every IRS audit i've dealt with, that cleared check image would have saved everyone a lot of time. Many banks offer this, many don't. I would recommend only using a bank that provides a copy of the checks with the monthly statement.

In addition to @David Beard 's correct response, i'll just add that there is no time frame on how soon you have to finance in order for the interest to be deductible.