All Forum Posts by: Naseer Khan

@Mark Barnes Both the S Corp and the LLC provide the same liability protection, so long as you follow the entity formalities and treat it like a business/separate entity. Whether to choose an S Corp or an LLC depends on the type of business one plans to pursue. For example, if one plans to buy and hold real estate, then the LLC is better suited for that person, but if one plans to do something more active (quick flips, wholesaling) then the S Corp is better for them, simply for tax planning and savings purposes.

This response neither constitutes legal advice nor establishes an attorney-client relationship. Inquirers must seek the advice of their own legal counsel prior to undertaking any course of action related to this inquiry.

@Kris Kahrs It will be very difficult to wipe away a tax consequence entirely from the sale of your home. Unless your combined income is more than $465,000, your capital gains tax rate is only 15%, which would put your tax bill at approximately $40,500 (assuming $270,000 non excludable gain). This capital gain amount is not included in your taxable income, so it should not put you in a higher tax bracket (may need to confirm with a CPA). I think you are in a very favorable situation as it is. I know this doesn't provide you with an answer to your question but it's just some perspective. 

@Eli Kallison If your deals are getting more complicated, it is a good idea to have an attorney and CPA that are familiar with REI, as well as an investor friendly realtor.

If you are going to bring on partners and/or if you plan to buy multiple properties, then you will need to strategize with a business entity, insurance, tax advice, and a good attorney and CPA can help answer your questions and guide you. 

I work primarily with real estate investors, and a lot of my clients are inviting out of state. Feel free to reach out if you need a consult. 

@David Yu I second the opinion of @Matthew Kreitzer as there are many factors to consider, such as your personal wealth, your level of real estate investing, the type of properties you own, etc. Feel free to reach out if you would like a consult. 

@Snehal Ambare If you’re thinking of converting your personal residence into a rental in order to take advantage of the Section 1231 loss rules, you may want to reconsider because the IRS has implemented certain limitations for conversions. When you convert your personal residence to a rental property, your new cost basis will be the lesser of the following values on the date of conversion:

• The fair market value of the property, or
• The property’s current tax basis.

Because of this rule, if your personal residence has lost value since you bought it, turning it into a rental home won’t allow you to deduct the loss that occurred before the conversion when you eventually sell it. Only a drop in value after the conversion would be deductible.

Example:

You convert your residence into a rental when the property's cost basis is $350,000, and its FMV is $250,000. Later, you sell the property for $210,000, after claiming $15,000 in depreciation deductions.

Since the FMV was lower than the property's cost basis at the time of conversion, the FMV will be used as the cost basis. For tax loss purposes, your tax basis is $235,000 ($250,000 FMV on conversion date minus $15,000 depreciation = $235,000).

That means you do have a deductible loss, but it’s limited to $25,000 ($210,000 sale price – $235,000 basis = ($25,000) loss).

For simplicity, this example excludes the potential impact of carryover losses and depreciation recapture. Depreciation recapture is essentially paying tax on a portion of the depreciation deductions. Depreciation recapture tax is assessed at a different rate (25 percent in 2015) and only applies to the lesser of the gain or depreciation allowed. 

@Linda Lai Hi Linda - I work with a lot of new investors who don't have much investing experience. I can guide you through the process of out of state investing, business entities (LLC S Corp, etc) and tax issues. Feel free to reach out.

@Sagar S. I have a lot of clients from California that are investing out of state. One strategy that may reduce costs could be to open a California LLC as your primary company. Then as you invest in other states, open a separate LLC in those states and make your CA LLC the owner/member of the out of state LLC. Alternatively you can apply for a "foreign business designation" in each state through your CA LLC.

This way you only pay the CA franchise tax for one LLC. However, You still have to pay the other states' franchise taxes or fees but they are likely less than CA.

Moreover, you don't have to place each property in its own LLC, you can place several properties in one LLC. The number of properties per LLC can be determined by certain factors: how much equity you have in the properties, what kind of tenants do you have in the rentals, etc. You have to weigh out costs and liability risk.

The above is General advice and you should seek private counsel.  This does not create an attorney client relationship. 

@Stephen Holloway welcome. You'll find a lot of useful info here. An LLC that is properly setup and maintained is a great way to protect your personal assets. Adding an umbrella policy will help pay for any issues that may arise. If you have any specific stategy questions, feel free to reach out.

@Jake Gaines As a wholesaler, the income generated is likely going to be active income (vs. passive income for buy and hold), so an S Corp is generally better suited for that type of activity because of the tax saving benefits (less income is subject to self-employment tax). I think the attorney you first spoke with was on the right track. 

@Bryant Fong Keep in mind that passive losses from rental real estate can only be deducted from passive income and not ordinary income. There are exceptions for Real Estate Professionals and Active Participation rules. Check out this article on Passive losses