All Forum Posts by: Michael Plaks

I'm sure you can ask John directly. http://iralawyer.com/

The ultimate authority if you need one is John Hyre   

@Andrew M.

Three issues at play here. Legal protection, taxes, and practicality. 

Taxes are simple. There is no difference for taxes, one way or the other.

Legal protection is up to the attorneys (I'm not one) - who notoriously disagree on everything related to Series LLC: from their viability to operational details. I've hosted attorney panels here in the great state of Texas ever since Series LLCs were introduced, with the same result: no consensus. Attorneys, when I bring this up, laugh and nod in agreement.

The most conservative attorneys insist that each series needs a separate bank account, a separate set of books, and a separate tax return. Otherwise, they say, the legal protection can be pierced. Other attorneys say that this is an overkill. Third group of attorneys question whether "1 property per series" approach can provide its supposed protection at all, regardless of bank accounts and such. Again, attorneys will not agree on this. I always tell my clients to find one attorney who they like and trust, and then follow this one attorney's advice without trying to validate it with other attorneys or, even worse, online. Validation is futile.

Now, practicality. Imagine you do not do anything with the property but hire a management company. They collect rent for you, pay all your bills and periodically settle with you. They do it for hundreds of properties for dozens of clients. Do they keep a separate bank account and separate set of books for each property? Clearly not. But they better designate each transaction as to which property it applies. Then they can instantly generate a per-property (per-series) report. You can imitate the same system with your own management company, as @Carl Fischer suggested, and stick with one bank account.

Unless your attorney overrules this, out of legal protection concerns.

@Mike H.

It does not matter what investment strategy you use. Whatever you can do with cash - you can do the SAME exact strategy inside your retirement account.

My point is: whatever investment you pursue, doing it inside a retirement account BEATS doing it with cash taken out of retirement account, due to difference in taxation and power of compounding.

The more aggressive your investment is - the bigger is the advantage of doing it INSIDE retirement accounts.

I'd like to respond with my opinion, which also happens to be 100% correct. :)

$100k cashed out of retirement funds leaves you with about $65k cash. $65k invested with a very modest 15% return, with taxes eating into it every year, ends up being $200k.

$100k left inside a retirement account for the same 10 years and the same 15% return ends up being $400k. Pull it out and pay tax - you have $300k cash left.

So, $200k or $300k? What you're saying is that you'd rather settle for $200k for the sake of being "free from the IRS tyranny."

Also, I intentionally used 15% return - which is pretty dismal for RE investments. With higher returns, the tax-free compounding power of IRAs becomes even more dramatic.

This is before we start talking about Roth, by the way. Your freedom is rather costly.

@Reggie Jackson

I recommend you re-post your question by clicking "start new discussion" at the top of the screen. You attached it to an old discussion, and you will get more attention if you start a new one and name it "Deducting renovations on a duplex" or something descriptive like this.

Interesting discussion indeed. @Mike H. - the tax system is not meant to make sense. It is meant to provide employment for millions of govt workers and tax accountants.

@Carlo Michelotti - the best answers are offered by @Brandon Hall, @Linda Weygant and @Frank Palomino.

I will try to summarize what my colleagues said and resolve the remaining confusion if any. I wrote blog posts about 1099s, but BP won't let me link to them from here. You can google them. So, here we go.

1. Deducting an expense and issuing a 1099 are two related but separate issues. You can always deduct labor, with or without a 1099. If you're audited, you will need to prove that the money was paid. Issuing a 1099 is an additional requirement. If you fail to do so, your expense may still be allowed, but you will be hit with heavy penalties. Yes, the IRS does pursue people for not filing 1099s.

2. You're subject to 1099 rules if you run a "trade or business." This is an infamous grey area. Flippers, wholesalers and Realtors are 100% "trade or business", there's no debate about it. Landlords who report their rentals on Schedule E (including disregarded LLCs) normally are NOT considered "trade or business." They can usually check the "not required" box on Schedule E and forget about 1099s. One exception: if you're claiming the notorious "RE Pro" status to get around limitations on deducting losses - then you absolutely become a "trade or business" and must obey the 1099 rules. If you're a landlord filing as a pass-through entity (partnership or S-corp) - then it's debatable. I recommend you stay on the safe side and assume that all pass-through entities are "trades or businesses" and are subject to 1099 rules.

3. Warning for landlords: before you quit reading and decide that 1099s are not your concern, understand that it can still backfire. Once you claim that you not a "trade or business" for 1099 purposes, the IRS can use your position against you. They can disallow your deductions for various business operating expenses, such as marketing or education. Bottom line: even if you think you don't have to file 1099s, it is a wise strategy to do it anyway.

4. Now, who do you send 1099s to? Generally, to anybody who provided you at least $600 in services during last year. The key word is "services." This is why you do not send 1099s to Home Depot: because you buy materials there, not labor. If your contractor separates labor from materials - you issue a 1099 for labor. If you contractor does NOT separate labor and materials, you issue a 1099 for the total amount. It is his problem, not yours. Besides contractors, you issue 1099s to everyone else who provided labor and services: consultants, wholesalers, stagers, accountants etc. 

5. First exception: corporations. If your contractor or vendor is a corporation - no 1099s needed. However, LLCs are not corporations (most of the time) - so you do need 1099s for most LLCs. How do you know if they are a corporation? Give them Form W-9 to complete. They should check the "corporation" box and sign. If they checked the box - you're off the hook. But keep the form!

6. Second exception: electronic payments. If you pay anybody with a credit card or some form of electronic payment like PayPal - no 1099s needed for these vendors. In fact, you should NOT issue 1099s to them. If you paid them $5,000 by credit card and another $1,000 by check - then you still need to issue a 1099 for the $1,000.

7. How do you get their SSN for 1099s? They must complete Form W-9 before they start work. After you paid them - forghedaboudit. Game over, you lost. If they have brains, then will not give you SSNs, and you really should not accept them either - due to ID theft and all. They need an EIN which they can obtain for free on the IRS website. Help them if needed. No need for an LLC to get an EIN. An EIN is just a substitute for the SSN, for business purposes.

8. But they won't complete W-9. Yes, I know. This was discussed by other people on this thread. It's best to use clean contractors, for many reasons. Saving a few bucks by hiring illegal contractors or cheaters can turn out to be very expensive. You might have to deal with their shoddy work, claims for workplace injuries, and IRS penalties. In bigger cases, even with immigration enforcement. Not to mention that if they cheat on taxes, they may cheat on you. But it's your business and your decision. 

9. But they will give me fake numbers. They might try. You can verify it for free though - so it's not an excuse. 

10. But I have never done it. Well, start now. If the IRS catches you, at least you will show that you started following the rules. This can save you from penalties.

11. Too much work. Or too much IRS penalties - your choice. Filing 1099s can be done online for a nominal fee, sometimes for free. Google "e-filing 1099-MISC" for 3rd party providers.

@Will Ellis

Yes, you distribute all general business overhead expenses between existing properties. Most of the time, it's evenly split between them, unless there is a reason to allocate the bulk of a deduction to a specific property. 

Do NOT create a "dummy" property with no rent for this purpose. I know some people who enjoy IRS audits, but not too many.

Business driving is deducted on Schedule E, not as itemized deductions. Unless you track your miles per property (it would be very compliant, but not very practical) - divide driving evenly between the properties, as well.

@Hipolito Garza

I'm not an attorney, but it does look like this was a so-called "subject-to" deal. If it was, then it is completely legal and fairly common. They just did not explain it to you well.

Whoever bought your house, owns it legally now, assuming the paperwork was executed correctly from the legal point of view. However, instead of getting their own mortgage, they continue to pay the mortgage that you had, and it stays in your name. The documents signed by you should say that THEY, not you, are legally responsible for paying off your mortgage.

There is no need to worry or do anything and go after them, as long as they keep making timely payments for your old mortgage, which they should. Now, if they do not make those payments timely - it will hurt your credit. In this case, you may need to go after them for breach of contract.

Again, I'm not an attorney, so don't take my reply as legal advice. This is just an opinion based on what I have seen.

A lot of us can help you while not being in CO. But if you need CO, one possible place to check out is http://www.secure-accounting.com/