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Tax, SDIRAs & Cost Segregation

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Corey G.
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  • Phoenix, AZ
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Property management LLC (filed as an S-corp for taxes) on my own properties?

Corey G.
  • Investor
  • Phoenix, AZ
Posted Apr 10 2024, 16:31

So I posted the other day asking if I could get around passive income on my rental properties so I could contribute to my retirement account. Post here: https://www.biggerpockets.com/forums/51/topics/1183339-contr... I read that it was possible to create a PM company under an LLC and pay myself to manage the properties but then I would be subject to 15% Self Employment taxes. However, now I'm learning that I should be able to do the same thing and just classify the LLC as an S Corp when filing my taxes and it avoids nearly all of the self employment taxes. This would then allow me to create a solo roth 401k and contribute a substantial amount more to it than just a traditional roth IRA. Has anybody done this? Do I have the gist or am I missing something important? I don't have a CPA yet and so I don't have anybody to ask currently. (I need to shop for one as I don't have a lot of friends doing the same thing as me in my state.) If this sounds like it's doable, then I'll need to find one and get the process started. Any information or experiences are appreciated.

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Michael Plaks
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Michael Plaks
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#1 Tax, SDIRAs & Cost Segregation Contributor
  • Tax Accountant / Enrolled Agent
  • Houston, TX
Replied Apr 10 2024, 17:10
Quote from @Corey G.:

So I posted the other day asking if I could get around passive income on my rental properties so I could contribute to my retirement account. Post here: https://www.biggerpockets.com/forums/51/topics/1183339-contr... I read that it was possible to create a PM company under an LLC and pay myself to manage the properties but then I would be subject to 15% Self Employment taxes. However, now I'm learning that I should be able to do the same thing and just classify the LLC as an S Corp when filing my taxes and it avoids nearly all of the self employment taxes. This would then allow me to create a solo roth 401k and contribute a substantial amount more to it than just a traditional roth IRA. Has anybody done this? Do I have the gist or am I missing something important? I don't have a CPA yet and so I don't have anybody to ask currently. (I need to shop for one as I don't have a lot of friends doing the same thing as me in my state.) If this sounds like it's doable, then I'll need to find one and get the process started. Any information or experiences are appreciated.

You and your friends should not be messing with this when you don't understand these concepts well, and they are confusing.
- rentals do not go under an S-corp, which is why a separate PM company was suggested
- S-corp technique on reducing SE tax is both tricky and costly, and you cannot set up your salary arbitrarily
- you can only base your 401k on the part that IS subject to SE tax
- you usually cannot generate enough "earned income" from this 2-companies setup to make it worthwhile for 401k

See, it is not simple. Get yourself some good tax advice from a real tax pro. But right now none of us has time due to the April 15th deadline.

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Corey G.
  • Investor
  • Phoenix, AZ
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Corey G.
  • Investor
  • Phoenix, AZ
Replied Apr 10 2024, 17:55

"You and your friends should not be messing with this when you don't understand these concepts well, and they are confusing."

Who is messing? I'm asking if it's possible before I go through the hassle of hiring a CPA for one question that I find out is probably not doable or worth it. 

"See, it is not simple. Get yourself some good tax advice from a real tax pro. But right now none of us has time due to the April 15th deadline."

Who said it was simple? I asked if it was doable. You make it seem like everybody should go set up an appointment with a professional anytime someone wants to ask one question about a particular topic... that's kind of the point of the forum. Bigger pockets wouldn't exist if every answer was "just go hire someone".

If I needed to speak with a professional every time I had a question about real estate, I wouldn't have got to the point where I've essentially made this my full time job/retired off my rental income. 


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Michael Plaks
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Michael Plaks
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  • Houston, TX
Replied Apr 10 2024, 19:44

@Corey G.

I know what BP is for and what this forum is for. Some questions are simple and can be answered on a forum. I have almost 5,000 posts where I've been answering these questions over the last several years.

What you're asking is a complex one. It does not have a one paragraph answer. Especially since you're clearly confused by several tax concepts that you read/heard about.

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Corey G.
  • Investor
  • Phoenix, AZ
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Corey G.
  • Investor
  • Phoenix, AZ
Replied Apr 10 2024, 19:49
Quote from @Michael Plaks:

@Corey G.

I know what BP is for and what this forum is for. Some questions are simple and can be answered on a forum. I have almost 5,000 posts where I've been answering these questions over the last several years.

What you're asking is a complex one. It does not have a one paragraph answer. Especially since you're clearly confused by several tax concepts that you read/heard about.

 Except you clearly posted that what I wanted to do likely wouldn't work. All in about a paragraph... so it seems a pretty easy to answer question after all.

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Corey G.
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  • Phoenix, AZ
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Corey G.
  • Investor
  • Phoenix, AZ
Replied Apr 10 2024, 20:14

For your level of questions, you need to set up an appointment and pay someone to give you proper advice. It's like saying "do I take the road to the left or the road to the right" and each choice you make opens up new questions. Someone with a great deal of tax experience has answered your question, I'd suggest you arrange a "paid" phone engagement if you don't have anybody locally. The amount of time you will waste trying to dance around the issues will be legenday and shall I say, "insisting on being right (or insulted) when you don't know the answer can be costly".

I was planning on getting a CPA, but not knowing the right questions to ask of someone who I don't exactly trust yet (as a new customer) isn't the best way to go about things. If I have some insight into the general strategies of how to do what I am asking (which is what I was trying to get asking these questions) it would help me during that conversation. The fact that I can regularly speak to many real estate finance "experts" and many of them are uninformed about certain financial rules/options is one of the things I've had to learn the hard way. For instance, one "expert" I wasted my time/money on because he wasn't as informed/educated as he pretended to be. After spending thousands of dollars, I had to get someone else to fund my loan. So using this forum to gain a little advice on strategies (I read online and elsewhere in the forum) seemed like a good place to start. But instead of getting steered in a direction of right/left per your example, I'm told "you shouldn't be messing with concepts you don't understand" and "it's not simple, go get some advice from a real tax pro" who in all likelihood will just be an accountant who files taxes for a living and has no real experience with these concepts and will tell me it's not worth it, like Mike did. 

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Patrick O'Sullivan
Property Manager
  • Property Manager
  • Phoenix, AZ
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Patrick O'Sullivan
Property Manager
  • Property Manager
  • Phoenix, AZ
Replied Apr 10 2024, 21:41

Corey, I have an EA referral if you're in need. She handles our taxes now for many years and a personal friend. Let me know, I can see if she's taking on new clients.

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Corey G.
  • Investor
  • Phoenix, AZ
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Corey G.
  • Investor
  • Phoenix, AZ
Replied Apr 10 2024, 22:42

Hmmm, guess you didn't notice that @Michael Plaks is an "Enrolled Agent".

There are hot dog vendors, there are fast food cooks, there are sit down resaurant cooks and there are fine dining chefs. Enrolled Agents are fine dining chefs.

What Is an Enrolled Agent?

"An enrolled agent (EA) is a tax professional authorized by the United States government to represent taxpayers in matters regarding the Internal Revenue Service (IRS). EAs must pass an examination or have sufficient experience as an IRS employee and pass a background check."

They practice in Tax Court.

That's not an "accountant. ;-)

But frankly, his time is too valuable to argue with you and he isn't going to defend his expertise. Doesn't need to. 

I wasn't calling him an accountant, I was concerned who I would reach out to wouldn't have the expertise and I wouldn't know the right questions to ask. Michael wasn't exactly offering his expertise to me... so what does it matter what credentials he has? Besides I'd be looking for someone local. I'm wondering why both of you are on here not offering any help or solutions, just to criticize me for asking a dumb question (that I didn't think was so dumb from reading other posts in this forum). At least Patrick chimed in offering to help with a referral. Perhaps you both should go bash on someone else's post for a while and let the people who want to help chime in on this one.

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Replied Apr 16 2024, 15:43

Yes, classifying your LLC as an S corporation when you file your taxes can avoid most self-employment taxes and open up new retirement planning opportunities like a solo 401k. This can be an effective way to manage your tax obligations and maximize investment opportunities.

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Michael Plaks
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Michael Plaks
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Replied Apr 16 2024, 17:41
Quote from @Leonardo Chandler:

Yes, classifying your LLC as an S corporation when you file your taxes can avoid most self-employment taxes and open up new retirement planning opportunities like a solo 401k. This can be an effective way to manage your tax obligations and maximize investment opportunities.

Can >>sometimes<< avoid >>part of<< the self-employment tax.

And it does not "open up new opportunities." In fact, it would usually limit your ability to contribute to retirement plans.

S-corporations work only in very specific situations. Recommending it as a universal approach is bad advice.