All Forum Posts by: Mike Percy

Thanks for the referral @David Kane! I will reach out to Michael.

Perhaps I should be seeking a corporate attorney instead. I'm not sure what type of lawyer specializes in this stuff.

Hello BPers, I am looking for a Real Estate Attorney in the Atlanta area that can help with forming a land trust and drafting an LLC operating agreement. I'd really prefer to get recommendations from other investors instead of searching on Yelp to hopefully find someone competent and trustworthy. Thanks in advance for any help. Please feel free to PM me.

Apologies for the delay in responding on this thread. I was occupied with a bunch of family stuff over the weekend.

@Patrick Miller thanks for reaching out. I am trying to invest outside of turnkey at the moment but I will get in touch if I change my mind.

@Daryl Askew nice to hear from you. Let's connect, I am considering investing in something that will need some work.

@Curt Smith thanks for the link to your group! I will check it out.

@Dave Friedman it would be great to share insights on the Atlanta market. Let's chat soon.

Does anyone investing in the Atlanta area have suggestions on who to work with when looking to build a remote investing team for buy, fix and hold on SFR? I am trying to avoid going Turnkey at the moment.

My tentative plan is to find and build a good relationship with both a local RE agent and an inspector (I need to be able to put a lot of trust in them both) who can do video walkthroughs for me. I believe for light rehab I would be less reliant on accurate GC estimates which I want since this will be my first rental.

Have others here done something similar? Are there other kinds of people besides RE agents and inspectors I should be considering partnering with or recruiting help from (to do drivebys and send me videos / photos and their opinions on a property)? Any ideas for a better plan?

Yes, I know that buying local is simpler but I am in the Bay Area and the prices + rent-to-buy ratios are just unbelievable here.

Thanks in advance for any suggestions or referrals!

@Linda WeygantThank you for the clear explanation! Your analogy is great; I was hoping the IRS had something on this particular issue for the layman but of course they can't do that for every possible situation. We're lucky to have pros like you helping out on this forum!

@Caleb Heimsoth I totally agree with you!

Thanks again.

@Patrick Liska This seems to be something of a grey area but I think you are right about that in terms of being extra careful with the IRS. Thanks for your thoughts!

@Linda Weygant Thanks very much for that info! It's great to hear from a knowledgeable CPA such as yourself. I finally was able to find IRS Topic 425 that confirms that rental income is passive even if you personally manage the property:

One thing I am still unclear on is according to IRS Publication 3402 under the section LLCs Classified as Disregarded Entities there is a section on self-employment (SE) tax that states:

Since Topic 425 (passive activities) seems to be at odds with Publication 3402 (LLC member taxation), is there some published guidance on what to do when the two are combined? Based on the Forbes article I linked above that discusses IRS CCA 201436049 it sounds like in certain cases LLC members will be treated as general partners under the tax code (thereby owing SE tax) and in other cases LLC members will be treated as limited partners under the tax code (no SE tax).

@Alex Deacon Thanks for the warning and I totally agree. I will certainly build a good team however at this stage in the game it's all in Excel so I really just want to make sure my numbers are realistic.

@Patrick Liska Thanks very much for the reference to IRS Publication 527. That definitely helps in understanding the definitions of active vs. passive activities. But I am not sure whether it fully resolves the question about taxation of distributions from a partnership.

To add a little fuel to the fire, I also found a recent article by Steve Gorin referencing some recent Tax Court decisions ruling that passive members of an LLC do not owe self-employment tax. I've pasted the interesting portion of the article below.

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The Hardy decision

However, Hardy v. Commissioner, Tax Court Memorandum 2017-16, had a surprising result. Together with seven other equal owners, the taxpayer owned an LLC that operated a surgery center. Each member was also a manager; together they controlled the LLC. They delegated daily operations to an employee, who professionally ran the surgery center. In determining whether the taxpayer's income from the LLC was "passive," the judge focused on actual daily management of the business rather than the taxpayer's legal rights to manage the LLC together with the other equal owners. Based on this focus, the judge treated the taxpayer as a limited partner eligible for the exclusion from SE tax.

This approach appears to contradict the approaches taken in two other Tax Court cases, Renkemeyer, Campbell and Weaver, LLP v. Commissioner, 136 T.C. 137 (2011), and Methvin v. Commissioner, T.C. Memo. 2015-81. As a "regular" Tax Court case, Renkemeyer has stronger precedential value than Hardy or Methvin. Also, in CCA 201436049 (not precedent but a good indication of where the IRS stands), the IRS refused to apply the limited partner exception to an LLC's active owner but implicitly accepted its application to an inactive owner.

Given the state of the law, those who wish to have certainty in avoiding SE tax should consider conducting business through a limited partnership, either directly or through an LLC owned by the limited partnership. However, many tax advisors will suggest taking a risk and directly using an LLC. Whether those who heed that advice will attain the result they seek remains to be seen.

Hello Bigger Pockets community,

I am looking into the possibility of investing out-of-state in a buy-and-hold rental property for passive rental income. I am considering a structure of holding the title in a land trust with a single-owner LLC as the beneficiary (see Clint Coons on YouTube for the various benefits of this structure, i.e. here and here). Because it's out-of-state, the LLC would need to hire a property manager to take care of leasing, collecting rents, daily issues, etc.

Because I am outsourcing the property management aspect, would this still be considered active income and therefore subject to self-employment taxes or is it possible to classify the income as passive and therefore not subject to those taxes? Would rehabbing the property before renting it out affect active / passive? What if the LLC paid a contractor to do that as well?

Unfortunately, I've read that it may not be possible to avoid this tax if the income flows through an LLC to a member of the LLC (see Forbes). Self-employment taxes are around 15% which has a big effect on cash flow so I'd like to avoid paying them while retaining the liability protections of an LLC if possible.

When trying to research this specific question, I found a couple of really hand-wavy forum posts from people who mentioned setting up multiple entities (LLC for the property and a C- or S-Corp for the property management) to minimize self-employment taxes on rental income. After many attempts to search on this site and on Google I haven't been able to find a definitive answer on how exactly that works, whether it's necessary, and whether it could also be done with a single LLC in the way I'm describing (outsourcing).

I know I will probably need to double-check with an estate attorney and a CPA / EA but I'd love to get some early insights from you knowledgeable folks before I go barking up the wrong tree.

Thanks in advance for any advice or links to definitive information on this topic. And good luck with your investments.

Mike