All Forum Posts by: Jake Hottenrott

Nope, I would never trade a guarantee for a 20-25% discount off market prices!  If you screen your tenants thoroughly and do all the right things regarding property management and maintenance, you will end up thousands of dollars ahead each year by renting at market prices.

@Guillaume Derouet , @Arlan Potter is exactly right.  This forum is a great resource, but you will be better served by sitting down and going through your current situation and your future plans with a CPA.  This will add some substance to the conversation instead of people speaking in "generalities" about a hypothetical situation.

Best of luck and let me know if I can help!

Jake 

Hi everyone!  I'm glad this thread came across to me based on my keyword alerts!  I'm Jake and I'm a CPA and real estate investor based on the Illinois side (Belleville).  We should definitely try to do a meet up with BP people in the future! 

Welcome!  The best advice is to get started!  If you need anything from anyone here, always feel free to ask.  There are many people who can help you achieve your goals out there.

@Account Closed To answer the question about making things easy on your CPA. If you own all your properties in a single LLC, you will likely only see one line for "Insurance" on your tax return whether the properties are bundled or each on their own policy. For financial statement purposes, your CPA may break out each property separately with the related insurance cost to show you the profitability for that particular property. Even when bundled under one policy, the insurance company will show the cost of insuring each property on the bill/statement. In short, on this one, don't worry about your CPA. They will be just fine!

@Bill Exeter this seems to be your niche.  What are some ways that Brandon could demonstrate his "intent"?  Any good IRS letters/ruling/pubs you could reference?  Thanks for posting!

Qualifying for a 1031 exchange requires both properties have to be held as an investment or used in a trade or business.  Held for investment refers to future appreciation while used in a trade or business means income producing such as a rental property.  In a flip, there was never any rental income so as such it's not income producing.

Section 1031 then goes on to state that property held primarily for resale does not qualify. An example of held for resale is a developer who buys land, breaks it up into lots and sells the lots (this is a "dealer").  Also, a fix and flip where a property is purchased, fixed up and then immediately resold.  To the IRS, these are the classic examples of held for resale.

A flip can be turned into an investment in the eyes of the IRS so that you can do a 1031 exchange.  In order to do this you need to hold the property at least a year.  The IRS does not want short terms capital gains (higher tax rate) being turned into long term capital gains (lower rate)  by doing an exchange during the first year.  The IRS also wants to see the property bought in one tax year and sold in another tax year.  This requires holding a year and a day.

So the short answer to your question is that no, you can't use a 1031 exchange when selling a short term investment.  

Danielle,

I think I can help you understand the logic behind your CPA's suggestion.  It is surely not a "requirement" to have it taxed as an S Corp.  Without knowing your situation or goals, I can't tell you what is best for you.  If your CPA didn't explain the logic behind his suggestion, then you may want to find an adviser who you can work with to understand not only the output, but the decisions and information that were taken into account to get to the end.

Being classified as an S corporation employee has one potential big advantage: S corporation tax treatment can provide a way to take some money out of your business without paying employment taxes. This is because you do not have to pay employment tax on distributions (dividends) from your S corporation—that is, on earnings and profits that pass through the corporation to you as an owner, not as an employee in compensation for your services. The larger your distribution, the less employment tax you’ll pay. The S corporation is the only business form that makes it possible for its owners to save on Social Security and Medicare taxes. This is the main reason S corporations have been, and remain, popular with professionals.

Example: Mel forms an LLC to operate his accounting practice and elects to have it taxed as an S Corporation. Mel is an employee of the LLC and receives a $100,000 salary. The remaining $100,000 of the business's profits are passed through the S corporation and reported as an S corporation distribution on Mel's personal income tax return, not as employee salary. Because it is not viewed as employee wages, neither Mel nor his corporation need to pay Social Security or Medicare tax on this amount. Mel and his corporation only pay a total of $15,300 in employment taxes (15.3% x $100,000 = $15,300). Had Mel not elected S corporation status for his LLC, he would have had to pay self-employment tax on his entire $200,000 profit. This would have required him to pay an additional $2,900 in Medicare taxes and $1,252 in Social Security taxes.

I hope this helps!  If you have any additional questions, feel free to keep the ball rolling here!

Thanks,

Jake

Curt,

You are correct. Having each property in its own LLC is a great way to unnecessarily kill cash flow. However, some states allow you to create a series LLC that allows divisions within a LLC. For you, it would work since Tennessee allows series LLCs , but unfortunately for William Morrison in Maryland it would not work.

Beyond the benefit of having each property in a separate division or "cell", there are a few negatives.  These include filing fees for each cell created, maintaining bank accounts for each and maintaining books and documentation for each.

I could go on and on about series LLCs, but this is probably the most pertinent information!

To answer the actual question originally asked:

I use a series LLC and name each series the name of the property.

ABC, LLC - series 123 main st

ABC, LLC - series 789 first st

Etc...

I hope this was useful!

Jake

Kenton,

Disclaimer: I'm a CPA, so I see this side of it daily.  Others may have different views based upon their experiences.

A knowledgeable CPA will be able to not only provide you with insight on deductions and business structure, but they will also help to educate yourself through conversations and questions.  A CPA who works with real estate investors sees many people who are doing something similar to you,  they can aggregate all that knowledge and provide additional advice based upon experience.  A CPA will also be able to help you analyze numbers, ask you questions about assumptions and work with you as a sounding board to make sure you are buying good deals.  Also, a CPA can help you set up your books so that you are able to track your income throughout the year so that you can make sure you are hitting the numbers you initially forecast.

In short, no, you do not need a CPA to do this, but you may find that a good CPA is well worth their fee in additional knowledge, tax savings and advice in the long run.

Best of luck!

Jake