All Forum Posts by: Kory Reynolds

You might be asking the wrong questions at Fidelity (not sure if they do or do not allow this), but you aren't technically investing directly in real estate, you are investing in private equity partnerships that are investing in real estate.

They might not want you buying direct interests in real estate, but are okay with private equity investments.

There are a number of posters here on the forum that work with people nationwide, so you likely don't need to limit your search to just south Jersey.  Even my local to me clients - 95% of them we never meet in person each year.  

@Basit Siddiqi is exactly right that Philadelphia / NJ has some unique reporting headaches that are often screwed up, so whoever you work with, gauge their experience working in numerous jurisdictions, or their teams access to those subject matter experts.

Those in the construction world and rental world open themselves up to some substantial opportunities from a tax planning perspective, but also need to be sure they thread the needle carefully on the real estate professional rules to actually qualify for them.

Agreed with @Account Closed - putting real estate, or a real estate partnership - within an S-Corporation provides effectively no value, while creating significant headaches and tax consequences.

The only real benefit left for an S-Corp is partial shielding of employment taxes - but a rental property already doesn't produce any self-employment taxes, so the one benefit already doesn't apply to the rental.

Then you have problems with not getting basis in the debt of the property, having a lack of flexibility on future structure, issues with distributions in excess of basis...just nothing about it is good.

If the Partnership hires a property manager, and that property manager ends up being your S-Corp - great, now you are perhaps better managing your exposure to self-employment income as a result of these property management fees.  This is different than the carried interest.      

With those stats, you'll pull half the accountants in the forum out of the woodwork, most of us would be more than happy to work with someone in your financial position as it means we can provide a fair amount of value.

Whoever you work with, I would recommend you consider finding a firm with substantial experience to offer in both real estate, and estate/gift planning given your goals..  Given the size of the income you are working with in semi-retirement, one would assume that you do have substantial capital to work with, or at the very least can accumulate it fairly quickly, so on top of just real estate tax savings strategies, you would also likely benefit from a team who has subject matter experts in estate and gift planning.  Your journey is two part - accumulate more wealth, and then how you are going to move it onto your kids - both have substantial tax planning opportunities.

Given you mentioned your primary motivation is taxes, a HUGE caveat you should keep in mind is that no matter what real estate investment you make, first and foremost it should make good business sense.  Tax benefits should be #2 on the list.  Tax benefits can help make a better business deal, but a bad business deal is hardly ever going to break even just because of tax benefits.

The other big consideration you should have, in order to actually benefit from real estate fueled losses or credits, it will require a substantial investment of time - either to get over the material participation thresholds for short term rentals, or to get over the real estate professional thresholds for mid term /  traditional rentals.  The point here is - it isn't just buy some rentals and get a third party property manager, in order for you to get the direct tax benefits against your pension / W-2 income, you could readily be required to invest anywhere from 100-750 hours per year.  If you are looking for a new activity, perfect.  

If you aren't looking to invest that kind of time, then perhaps you can still benefit with the leveraged returns you receive through real estate investment as a passive investor that can be tax advantaged, but the related losses won't be able to offset W-2 / Pension / Retirement Distribution / Roth Conversions / Etc.

Another consideration - do your kids have an interest in real estate?  It happens so often (but not every time!) that an older generation spends years accumulating real estate, they pass away....and then the next generation just sells all of it immediately since they don't want to deal with it.  Still not a bad way to get some leveraged returns that you pass on to your kids, but ensure that you find enough value in it while you are putting all this work in.

Or, find a business partner who has money, but not time.  You bring the time and a little money, they bring the rest of the money, and you go out and make some deals.

You are giving up more of the upside, but it is getting you in on deals you otherwise couldn't have pursued.  Would rather have 30% of a $1m deal than 100% of no deal.

The LLC has no impact on the effective tax rates.

Also if you acquire a property for the purpose of flipping, that will always be Ordinary Income, also likely subject to self-employment taxes.

That particular sales event has no impact on the taxation of your normal rental income from other properties.  All rental income is subject to ordinary income tax rates as well, though it is not subject to self employment taxes.

No, just document what happened and how the proceeds are used over time. An LLC provides no credence to a given tax position - it is primarily just a means of legal liability protection.

 Generally self storage is considered "Rental Income" unless there is some substantial services involved.  What is the level of involvement you will have? What is the level of services that will be provided?  IE is it just effectively a secured parking lot that renters can come and go as they please with minimal oversight?  Or are you offering cleaning & maintenance services?  

Assuming this is a passive business - meaning you are not materially participating - any cost segregation fueled losses would have no impact on your W-2 income.  The losses could be used against other sources of passive income and that is it.

If it is a standard self storage model, and thus treated as rental income, then in order to get anything other than passive treatment you would needs REPS status.  Assuming your $550k W-2 job is full time, that means you need to work 2081 hours (at least 50% of your time) in your rental business.  Something tells me you won't be working 4,060 hours to do so - 80 hours a week year round.

If it is a more active rental model that it is not considered "rental" income, then you would need to put in at least 100 hours with that being more than anyone else (employees, contractors, management company, etc), or you would need to put in at least 500 hours.

So your "quick" question is actually fairly complicated.  You should consult a tax professional to help get it sorted and set up a strategy.

If you are using the HELOC proceeds to acquire land for a property that will be business use in some manner (a rental), then that interest expense from the HELOC would be deductible against that business project. I'll stay out of the weeds of dealing with potentially capitalizing that interest expense to the land while something is actually constructed.

If the HELOC is being used to acquire land for a property that will be personal use, you are out of luck. Mortgage interest is (potentially) deductible as an itemized deduction on Schedule A only if it is secured by that given property. So if the HELOC is in no way secured by this second property, it isn't deductible mortgage interest. If you took out a separate loan secured by the second property, and that will be used as a second residence, then it is potentially deductible - subject to all of the other limitations of personal mortgage interest like the $750k balance cap.

Keep it simple.  Perhaps even just own the real estate under your own name while you are getting started and get a good insurance policy on the property.  Then go and get a good umbrella policy personally.  Really...no matter what happens,  your insurance policy is your first line defense and best defense.  If something goes sideways, I would be willing to bet 90% of these single owner LLCs formed for "asset protection" would be easily accused of piercing the corporate veil, and collapses the whole thing anyways.

Depending on the state you are operating in, even if you use a Wyoming formed LLC, you will likely be required to register in the state you are operating in, which may require disclosure of that information you don't want to give up already - check to see what those states require for disclosures when registering a "foreign" LLC that is operating in the state.

Literally no federal income tax benefits to where your LLC is registered. In some cases it can cause some state tax headaches to have a new LLC set up for every property (my home state of NH makes it a compliance bear). So you are introducing a lot more complexity for anonymity, and nothing else. Decide if that is worth it to you.

The short answer to your questions:

1) Okay

2) Okay, you can certainly do that. If you have an LLC wholly owned by you, which then wholly a owns 3 separate LLCs, that whole structure is disregarded for federal tax purposes.

a) It can be that easy. If you want your LLC to be respected for liability purposes, it should have an operating agreement, bank account (so an EIN) (this will also require disclosures to the bank on your identity), and for you to full respect it as a separate entity from yourself. Don't use it as a piggy bank, keep separate books and records, keep a proper accounting for credit card charges /etc, try not to collect rental payments on behalf...it goes on.

b) All three will be subject to income taxes in your resident state.  Each will separately be subject to income taxes in whatever state they are operating in, assuming each has an income tax.  If you pay taxes in any of those states, you'll typically get a credit against your home state taxes so you aren't being double taxed.  IE your rental incurred $1000 in taxes in the nonresident state, and incurred $1,200 in taxes in the resident state - you'll get a $1,000 credit to your home state, so your total out of pocket tax paid is $1,000 to the nonresident state, and $200 to your home state.