All Forum Posts by: Kevin Gray

Trying to time tops and bottoms is a losers game.  The stock market dropped over 20% at the end of last year...technically a "bear market".  Many people didn't even realize and missed an opportunity to buy in and now the market is up more than 20% since.  Or, what I saw most people do, is start selling investments because they thought it was the start of a bigger crisis.  If you have the equity and the prospective properties that check the boxes, why wait?  Certain areas may be preferred to invest in during times of recession.  People need affordable housing whether the market is up, down or sideways.  In fact, more  high end markets (New York City) have seen some areas drop in value substantially.  Look at Long Island City and what happened when Amazon pulled out!  Too many factors impact the value of a property to get caught up in timing a widespread recession.  As long as the consistent cash flow is there, I wouldn't worry too much about it.   Keep in mind, understanding the market you are investing in is far more crucial.  Whether you plan on renting or flipping is important.  Going to impact some far more than others.  Good luck!

Any match would be worth taking even if it's 50% of your contribution.  As many said above, it's additional money that's vested as you receive it.  Any funds you can receive from someone else for your retirement, is a plus.  What's important is to understand is your cash flow needs currently, which investments you feel more comfortable with (probably mutual funds in your 401k vs. real estate), and the amount of time and energy you will be spending on those investments.  The loan option on a 401k does give additional flexibility and access to cash, but more times than not we see individuals never pay it back and end up with tax issues/penalties.  Weigh the costs, taxes, benefits of each option and make sure you have a plan in place.  Not adding to your 401k with hopes of finding a great rental will leave you with more income you're paying taxes on now.  If the property doesn't work out, now you may end up spending that money rather than investing.

@Steven Hamilton II

Steve, nice to meet you too.  

Obviously I'm newer to BiggerPockets with only 7 posts.  Not a very welcoming environment around here it seems like....

I hate to be a downer, but with a significant overhaul of the tax code recently we are seeing first hand some RE investors (and individuals) get hit with huge tax bills and sometimes penalties.  There are tremendous benefits in the new tax code, but can be very challenging if you're not working with a pro.

Was curious to hear some "horror stories" out there.  Maybe cautionary tales that can save investors tens of thousands of dollars in mistakes.  I'll provide one we came across....

We met with an investor who cashed out all of their retirement accounts (under 59.5 years old) to invest in an opportunity zone.  The problem was it was not a qualified opportunity zone FUND, they just bought the  properties and proceeds from retirement accounts are not capital gains!  Throw in the 10% penalty in addition to the income taxes owed on the distribution and these individuals found themselves with close to a 6 figure tax bill.

Keep in mind withdrawals from a retirement account (401k, IRA, 403B, SEP IRA, etc..) are taxed at your ordinary income rate (unless your account has a Roth option)...NOT A CAPITAL GAIN! Also, depending on your age you could be exposed to a penalty as well. Consult a CFP/CPA/EA before transferring retirement funds and make sure transaction is allowed and set up properly to eliminate any unnecessary taxes, fees and penalties.

Causing a taxable gift is a possible consequence.  As of 2019, individuals do have a lifetime gift tax exemption up to $11,400,000 without owing actual gift tax.  This is per person for taxable gifts during your lifetime, but is also cumulative and includes the estate when one passes away.   You would still have to file any taxable gifts over $15,000 in value during the year to keep record. 

As mentioned above, your grandma would qualify for an exemption on capital gains so it would be best to sell the property in her name.  I'm sure there is far more information that needs to be discussed as to what will happen with the proceeds and what they will be used for.  Where will your grandma be moving and are the funds for the grandchildren, for other investments, or to be used for medical expenses and nursing facilities?

Gifting to grandchildren can also cause a generation-skipping transfer tax on top of a gift tax.

Best to contact a CPA/CFP/ Estate Attorney, etc....

@Juan Pablo Murillo

As mentioned above, little to no difference for tax purposes when comparing a single-member LLC taxed as a disregarded entity vs. holding property in personal name. Though there are possible benefits/deductions to keeping your RE business assets, entity, and bookkeeping separate from personal. That is a far more complicated conversation regarding Qualified Business Income and Sec. 199A, but may be worth speaking to a tax professional about.

As we go into 2019, figured I'd share a  tax related planning tip that I personally feel will be important for business owners and RE professionals moving forward.  For complete details, please reach out to a tax professional.

- For pass through businesses (Sole prop, LLC, S-Corp, Partnerships), up to a 20% deduction is available for qualified business income. For specified service businesses (consultants), you only qualify if taxable income is under 315k for couples and 157k for others. If you're taxable income is near or above these levels, consider using Section 179 deductions to reduce your taxable income allowing you to qualify for the qualified business income deduction.

-Section 179 deductions have been increased from $500k up front to $1mill up front.  Also, personal property used to furnish lodging may now be eligible where it wasn't in previous years.

Keep in mind, if you're income is near 315k joint or 157k single, it may be a good idea to HOLD OFF on a full Section 179 depreciation of property up front and rather extend it over a number of years to take advantage of the 20% qualified business income deduction of pass through businesses in multiple years rather than just one.

Obviously the details are a little more complicated, but this is a strategy that can save you tens of thousands of dollars not only in 2019, but the years following if done right.

Best of luck!

I've benefited from having close personal friends who I trust to partner with.  Outside of contracting work, my partner also was able to handle and attend the negotiations, property management, renting/marketing the property, etc...

As any business owner knows, time is money. Being able to spend little to no time on the time consuming aspects of RE investing while providing the initial funds has helped our business flourish. For a BRRR investor, being able to get my money back and have half the equity without the burden of long hours spent on a property has been an almost perfect partnership.

Just another way to consider building your RE business when you have a day job providing the W2 and funding.  You can't be everywhere and do everything!  Use this network to find trustworthy partners.

Hi BP community!  I'd like to share a tip that could save you thousands of dollars when purchasing and selling a piece of real estate.  

A tax prospect I recently worked with shared some information on how they got screwed in a real estate transaction when they weren't aware of how the property taxes would be paid and split by the seller/buyer for their time owning the house in a given year.  **Make sure to know when and how the property taxes are paid**. This example took place in Ohio where property taxes are paid in arrears (the year after).  So 2017 property taxes are paid in 2018. Meaning if you purchased a property, you will be responsible for paying the previous owners share of property taxes.

The way this works involves the seller at the time of the sale crediting an amount to the buyer for their estimated taxes owed for the given year.  This sounds like standard procedure but if not looked into properly could severely cost you thousands of dollars, sucking your profits.  The situation that burned the individual is that the title company used "the best information available" to determine the estimated taxes owed by the seller.  

The problem is that the seller had upgraded the property by about $50,000 in value and the county within Columbus, Ohio had appreciated in value drastically since the last assessment of home values.  A new assessment was done the year the individual bought the property but the new values were not released until year end.  So the estimated taxes credited by the seller to the new buyer was based off of old valuations at an older assessment.  Meaning, their estimated taxes were based on a property value almost $100,000 less than the current value.  When the individual sold the house a year later after flipping the property, they lost $5000 in profit because the money they were putting into escrow for tax payments was used to pay for the previous owners tax bill.  The seller's credit to the buyer at the time ended up being around $5000 less than what they actually owed, but once the transaction is completed the seller no longer has responsibility leaving the buyer holding the bag.

I'd be happy to share more details and how to avoid this!