Real Estate Corporation & LLC Structure FAQ

43 Replies

@Roberto Westerband To be safe, have one LLC for your passive and another for your active. First, it will save you money in time your CPA will have to spend sorting out things. Secondly, the last thing you need is the government wondering if you are doing everything right and anything wrong. The more transparent your business and taxes look the less headaches you will have to face with the IRS up your arse. Ask anyone who's been audited how annoying it is to have to prove little details that seem obvious, not to mention the CPA's invoice for having to sort your stuff when the tax man demands to open the books. Better safe than sorry. For the extra thousand or two it will cost to open an additional LLC for your active stuff, you will be winning in the long run.

@Sebastian Taylor You said it right! A different bank account for each LLC. One less horror story to tell around the camp fire :)

Hi @Roberto Westerband .  Since we're talking about funds (money), you would only be in danger of commingling of funds if you share the same bank account between the two entities or your own personal funds (or accounts).  As @Sebastian Taylor has said, just make sure each entity has its own checking account and that you're using them separately for each business.

Hi, 
My question is...how do I set up a partnership with a family member that is willing to come in strictly with the cash to acquire, rehab and sell a property? I know this question could have many possible answers. Specifically, if I set up an LLC to buy the property and rehab it...How the private lender interest are protected from possible lawsuits? I want to include the rehab costs and holding costs in the loan ... Can these costs be included on the promissory note and the title lien? Please, I don't expect anyone to answer all these questions but if you can give me some guidance on any specific question I would really appreciate it.

This is great. I love BP.

I know that these suggestions will very from place to place, and I have an appointment with an accountant scheduled for later this month.

That being said, I'd like to know if any of you have heard of something like what I am considering.

I have a Schedule C business (declared as personal income not an LLC or other corporate structure) which is projected to have a good year. Before I have to pay a lot of taxes next year, I'm looking to make a change in the business structure.

What I want to do is take revenue from this profitable business and put it into a real estate investment. This would transform profits into a business expense before I have to count it as income.

Basically, have you heard of anyone taking pre-tax revenue from one business and investing it in their real estate business without paying income tax on the transaction? If so, can you point me to any description of how they did this, or share their example here?

Thanks in advance for your help.

@Frank Jones ,

It doesn't work that way. There would have to be enough expenditures that are current deductions. Real estate must be depreciated so if you make 100k in profit and buy a 100k building, you are not going to have zero income.   You are going to have 100k of self employment income and a building that assuming you bought on January 1 would have depreciation of ~$3.636 without accounting for land which does not depreciate.

@Steven Hamilton II Thanks for pointing out my error, and better still for explaining how that depreciation works. Now I just need to figure out a different strategy.

@Steven Hamilton II , I have continued my research and stumbled upon something called a Checkbook Control Solo 401k. https://www.google.com/amp/s/www.forbes.com/sites/greatspeculations/2011/07/15/think-about-going-solo-in-your-401k/amp/ https://en.m.wikipedia.org/wiki/Solo_401(k) It seems that as a sole proprietor without any employees, I can create a Solo 401k. This allows me to contribute $53,000 per year and I have the option for this to be before or after taxes. Then, if I setup the account to give me Checkbook Control, I can direct that money into investments of my choice - including real estate. What am I missing here? Would this structure not reduce my taxable income by $53k while allowing me to invest $53k into real estate this year? Thanks for your feedback and advice on this.

@Frank Jones

Yes, if you have self-employment activity and no full-time employees, you can create a Solo 401k. The contribution limits for 2017 are up to $54,000 ($60,000 if age 50 or older). These limits are dependent upon sufficient income in your self-employment, though. Rollovers and transfers of existing retirement funds do not count toward the contribution limit.

Is there a book anyone would recommend on asset protection?

@Eric Jan

The Tax & Legal Playbook by Mark Kohler may be a good starting point for you. The author is a CPA and attorney and he can help with any of the strategies covered in the book.

Kohler's book is pretty good.  In the audio version, Mark reads the book and laughs at his own jokes.  :-)

anyone care to chime in on the pros/cons to putting real estate into a trust versus a LLC?

how about a family trust that is the beneficiary is a manager managed Wyoming LLC which is an anonymous manager listing on Wyoming's SOS.

Morning BP family!

I am using this area of the forums in effort to reach someone who has ran into this situation or guide me in the right direction.  I've sifted through a handful of other posts and could not find a direct response similar to my concern.  Let me enlighten you on the situation, as I will be seeking professional help from my attorney to doctor up the proper legal documentation to get started.

I have just finished another renovation (flip) if you will and starting to pull more people into this mix.  I have successfully completed 4 properties with gains on each, and am looking to gear this structure into a business entity so that the tax burden is less cumbersome and liability is lifted off my shoulders a bit as an individual.  Here is my situation:

My Contractor offered the idea of possibly joining teams and continuing to turn homes in a structure that he and I split the costs for Materials and other burdens, while I absorb the cost for labor to continue to pay him of course to keep the team working and afloat.  In the end, we handle this in terms of profit sharing.  The percentages of profit hasn't been completely decided yet as we are just bringing this to the table.  I have been working Time and Materials with this team, and I rather go the route of Bids for the project however  If he is tied to a materials $$ amount, I would assume it would push him to complete the job faster and not take too much time to completion.  At the moment, I am looking for the best route to approach this without being handled incorrectly.

Second approach to this is we may be completing 1 to 2 more of these fix and flips, and rolling into new build duplexes or quads.  I would basically team with him to cover all costs for land and dwelling with possible help from a 3rd investor (Paying interest over time of loan) to Cash out Refi once everything is completed.  

We were discussing the different benefits in going this route, and he prefers to buy and hold until mortgage is paid down then sell.  I had to explain the Capital gains would then be taxed from the sale unless otherwise 1031 exchanged into a new investment of similar or lesser value within 45 days of closure (new property lined up/under contract and custodial account finalized where exchange would go)  If using the cash-flow to invest back into the business, it would and could be a very successful business venture and payout to ourselves if a business venture is the right route to go for this type of situation.  

Where I am going with this is to pick your brains as i'm sure all of you at some point may have been in this situation before.  Am I approaching this in the right order?  Should I be focusing in only 1 niche?  Separate entities for Rentals, and Fix and flips with separate Bank accounts I assume?  Any suggestions and or guidance is welcome, as either way I will seek legal help to finalize this.  Just wanted to put feelers out on what others have experienced.  I rather learn from the failures of others rather than fear of failure and falling back into analysis paralysis.  However if that is what it takes, I will fail on my own to succeed.  

Again thank you all for your time and consideration, and looking forward to your responses.  Your time means everything!

-Rick

@Joshua Dorki

First off, thank you for all that you and the rest of the team do! You guys are awesome 😎

I’m getting a 404 error on the land trust link, just an FYI!

Looking forward to learning more and more from this site 👍🏼

Hi BP, 

My partner and I are working through what structure we should set up and I'd be very grateful for suggestions and advice from anyone who has set up a similar plan. We will be buying, rehabbing and holding 2-4 unit houses and eventually plan to add small multi-family to the portfolio. 

 We have multiple family and friends who are interested in investing. We are consulting with an experienced RE attorney and CPA, but would love feedback from those who have done it in the arena, so to speak. 

We are planning to set up an LLC as the "mothership" and then have per unit LLC's with separate bank accounts set up for each property. We would then sell shares to investors per property. This is the part I am not totally clear on and would love suggestions or resources to learn more on this type of structure, or advice on a better way to structure this type of business plan.

Thanks!

- Mike

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