All Forum Posts by: Nathaniel Busch

Matt,

How do you figure that a beneficiary having an address in CA creates liability for the fee? 

Per FTB, the filing requirement is as follows: 

• All LLCs classified as corporations that organize in California, register in California, conduct business in California, or receive California source income, must file California Form 100. The California Form 100 must be filed by the 15th day of the 3rd month after the close of the LLC's taxable year.

According to Matthew, he is holding a passive ownership in an entity and receiving Ohio source income. His entity is not conducting business in California, not receiving CA source income, nor is registering to do business in California. Consequently, he would not owe the fee. 

Nathaniel Busch, CPA 

Vasily,

You are what the IRS calls a "nonresident alien". 

Here's some general information:

http://www.irs.gov/Individuals/International-Taxpa...

There are very critical and important tax elections you must make in the first year of investing in the US. In the absence of such elections, the IRS can tax you on your gross income from investing in the US versus your net. Essentially, you would lose many of your legitimate deductions, simply by omitting paperwork from your initial Form 1040NR that needs to be filed for the first year of operations.

I would recommend finding yourself a tax accountant that's knowledgeable about the field of taxation of nonresident aliens. Otherwise, this could be a very costly venture for you. 

Nathaniel Busch, CPA

@Matthew Deines, don't forget that you'll have a filing requirement with the State of Ohio for tax reasons each year. If you have net income from the activity, you will end up owing Ohio nonresident withholding tax. 

Nathaniel Busch, CPA 

Originally posted by @Dave Bryant:

I have a couple of houses I am owner financing. I have heard that you are only allowed to owner finance 2 or 3 houses and still get taxed the normal capital gains rate (on the interest you profit from the sale), anymore than that and the IRS will classify you as a dealer, and you must pay the capital gains on the full sales price of the house, even when you havent received full payment yet. Can anyone clarify this for me?

Dave

Dave, 

The IRS will review the dealer status on a deal by deal basis, with primary focus on what your original intention was with acquiring the property. In some cases, a fact pattern could come into play if you show a continual habit of selling properties short term without any effort to hold on for appreciation or placement of a tenant. 

Did you rent these units out? Or simply acquire them, fix them up a bit, and unload them right away on owner financing? 

Nathaniel Busch, CPA 

Drew, 

Although I am not located in Fort Wayne (I'm in Columbus, OH), I have several real estate investors in the Indianapolis and Fort Wayne area that I work with continuously. If you're interested in hearing more, I can give you a buzz and share with you more. 

Nathaniel Busch, CPA 

Matthew,

Pulling up to $10,000 out from your ROTH IRA as a down payment will result in no penalty and no taxation.

Converting this parcel to an investment property a short while later will have no recapture or negative tax effect. If you wish to repeat this strategy (using ROTH IRA's tax and penalty free for first time home acquisition), you would need to wait two more years without owning your principal home. In your situation, it appears you will be owning your subsequent home so you would not be able to use this strategy again for the second purchase.

Nathaniel Busch, CPA 

Jeni,

I feel there is a common misconception that "dealer status" is some sort of a disease that once contracted, can spread to the remaining portfolio and other deals you do. 

When studying case law and precedent, it's clear that the IRS will view each individual deal you do independent of all others to determine it's own taxation. In other words, your original intent when acquiring that parcel or deal will be the overruling factor in determining its taxation. 

With that said, your intent in acquiring your rentals were for investment purposes, not short term profit accumulation or engaging on in a pattern of ordinary business. Thus, beginning to engage yourself in wholesaling deals will not alter your original intent with the rentals, thus not altering their taxation. 

So, I would not concern yourself with your rental portfolio being affected in the slightest. 

As for how best to structure the entity (S-Corporation versus LLC partnership), an S-Corp will probably be best for your partner, considering his whole source of income is from this activity. Assuming the two of you can reach a fair and reasonable compensation for both him and yourself, the remaining profit distribution would be exempt of employment tax.

When budgeting your payroll tax on your share of the salary, remember to consider the social security portion of FICA is assessed on the first $117,000 of earned income. Thus, if you have already eclipsed that with your IT W-2, the wage income you generate from wholesaling will only be subject to the medicare portion, which is considerably less. 

Nathaniel Busch, CPA 

Bryan,

Also beware that converting a primary residence into a rental property carries with it an often overlooked tax trap. Your depreciable basis in the property is the lesser of your original cost basis + cost of improvements prior to conversion or the FMV at the date of conversion.

In other words, if the value of your property has declined while you have owned it, don't expect to use the original cost of the property to determine depreciation. You'll be stuck with the lower value. 

Furthermore, should you subsequently sell the property you will only be able to use the lesser figure of FMV to determine the deductible loss.

The intent of the rule is to prohibit taxpayers from transforming a loss incurred while the property was used for personal reasons, into a deductible loss at a later date. 

Nathaniel Busch, CPA 

Damien, 

I would certainly recommend you establish an LLC with your partner. If your deals are in Maryland, be ware of the $300 annual Personal Property Tax you will need to pay for the right to own an LLC.

Structuring the LLC the correct way and labeling yourself as strictly a passive partner that really contributes no actual management or active participation on the business would allow you to avoid self-employment tax.

The question is whether the activities you are doing in the financial side constitute management of the business or active participation. There are more variables to consider such as the work and activities you perform outside of your capacity as partner, your time commitment to the partnership, as well as your partner's time commitment. 

With careful planning and organization, you could structure this to significantly reduce SE tax. Conversely, you could also establish an S-Corporation tag on the LLC to lower SE tax, but that could also carry complexities that would need to be navigated carefully.

Nathaniel Busch, CPA 

Jimmy,

IRC 469(c)(7)(C) states that the following "personal service" activities will qualify you for the designation: 

... real property development or redevelopment, ... real property construction or reconstruction; ... real property acquisition; ... real property conversion; ... real property rental; ... real property operation; ... real property management; ... real property leasing; or ... real property brokerage. 

To me, it wouldn't appear home inspection would fall under any of these designations. You'll note that property managers fall under the management criteria above. 

Nathaniel Busch, CPA