Burning Tax and Legal Questions~~

Tax, SDIRAs & Cost Segregation
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Burning Tax and Legal Questions~~

Philip Hy
Rental Property Investor · Plano, TX · Member since 2015 · 59 posts · 41 votes
I've asked a lot of people but not getting any clear answers. These questions are keeping me up at night! 1.) My wife and I want to maximize number of conventional loans. We heard if lenders see that we file taxes together, lenders will only give us a maximum of 8 or 9 loans. However, if we file separately we can get 18-19 loans. Has anyone else heard this? How do you file? 2.) Another question broadly about debt to income ratio and LLC protection. We have an LLC and a business savings account for that LLC. Ideally we'd have that business savings account handle all the rental income and mortgage payments (I read that if an LLC bank account doesn't handle all expenses and income, we could lose the protection of an LLC). But if we do, next time we want to get a loan under one of our personal names, won't it look like our debt to income is too high to get a loan? Lenders will ask to see our banks statements and but won't see the rent and mortgage transactions coming in and out. Can anyone suggest an alternative setup? Sorry for the lengthy post, but dying for some clarity on these issues.
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Jim KennedyPro Member
Accountant · Cherry Hill, NJ · Member since 2016 · 173 posts · 201 votes
9y

@Philip Hy 

You are going in the wrong direction! Don't spend all your cash first and then go to LOC's. Get LOC's first and save your cash. Here's the problem: Once you spend your cash, you have no more cash. Using the banks money protects my own money, while I get my funding and the tenant pays the bank back for me in their rent).

Our rental income and expense are nowhere near the business accounts I use for my CPA firm. At one time we had a dozen individual checking accounts - one for each property. Even though I am a CPA and my wife is a tax accountant and we know bank reconciliations like the back of our hands, , after 10-12 years of over 100 bank recs a year, we got tired of all the fun and grouped them and closed down some of the accounts. Now we have three accounts and clump several rental units into one. We grouped them geographically so we could remember. And the snag there is that if two tenants have the same rent amount and are depositing into the same account you don't know who deposited what, so we have no 2 rent amounts the same, ever. That way we know who paid what.

We've never had a lender ask to see our rental activity bank statements. We make them focus on the tax return because its a signed document by me, and that document  (the 1040) has an affidavit where you sign that says everything is true and accurate as far as I know, under penalty of perjury. And if I perjure myself against the IRS, they're a government entity, so the crime is on a felony level. 

Jim Kennedy, CPA

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  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    9y

    1. They should give them to each of you. I have never heard of that issue before.

    2. There is a way to set up your structure in a manner that will work for you.

    I like the parent LLC with subsidiaries for the properties underneath it.

    [email protected]224-381-2660
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  • Jim KennedyPro Member
    Accountant · Cherry Hill, NJ · Member since 2016 · 173 posts · 201 votes
    9y

    @Philip Hy if you and your wife file separately, your tax bill will likely be significant by higher than it is as a joint return - the tax rates are higher, deductions and credits phase out more quickly there's no Earned Income Credit, bla bla bla. 

    Heres a financing thought that I realized years ago, and maybe you can shape it to fit for you. I own and operate a series of residential and commercial units. We bought the first one with a line of credit against our home. Since the property we bought had no mortgage in place, we owned it. So we pulled a line against that house and bought another house...and so on. Then we bought some houses after that using LOC's for down payments, making careful that the rent covers the mortgage AND the LOC. So we are making monthly payments to about a dozen units, but only 4-5 are mortgages !

    Jim Kennedy, CPA

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  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    9y

    LOL at losing the earned income credit. I don't think I've seen someone qualify for it since I did the VITA program. 

    Don't stress on losing that credit...unless you make under $20k as a couple with no kids you can't get this any way. If you've got a pile of kids it maxes out at like $50k. Also something like $3k in any kind of investment income disqualifies it. 

    I bet most active investors won't have to worry on this one :)

    He is right regarding the fact that MFS is almost always worse tax wise. I can't make comment regarding if lenders will only issue to both of you the max of 10 loans- maybe 

    @Chris Mason - My tag isn't working. Ugh I'll try again in a 2nd reply. But I bet he knows the answer on this one.

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
    WebsiteView Page
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  • Philip Hy
    OP
    Rental Property Investor · Plano, TX · Member since 2015 · 59 posts · 41 votes
    9y

    @Jim Kennedy @Natalie Kolodij Thanks for the feedback.

    Regarding Jim's method of acquiring future properties, this is a method that we've given serious thought once we run out of savings for deposits on conventional loans.

    Jim, do all your transactions go through a business checking account? I've avoided using my business checking account for rent income and mortgage payments, because I thought lenders want to see those transactions in your personal bank statements to calculate and verify your debt to income ratio.

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  • Jim KennedyPro Member
    Accountant · Cherry Hill, NJ · Member since 2016 · 173 posts · 201 votes
    9y

    @Philip Hy 

    You are going in the wrong direction! Don't spend all your cash first and then go to LOC's. Get LOC's first and save your cash. Here's the problem: Once you spend your cash, you have no more cash. Using the banks money protects my own money, while I get my funding and the tenant pays the bank back for me in their rent).

    Our rental income and expense are nowhere near the business accounts I use for my CPA firm. At one time we had a dozen individual checking accounts - one for each property. Even though I am a CPA and my wife is a tax accountant and we know bank reconciliations like the back of our hands, , after 10-12 years of over 100 bank recs a year, we got tired of all the fun and grouped them and closed down some of the accounts. Now we have three accounts and clump several rental units into one. We grouped them geographically so we could remember. And the snag there is that if two tenants have the same rent amount and are depositing into the same account you don't know who deposited what, so we have no 2 rent amounts the same, ever. That way we know who paid what.

    We've never had a lender ask to see our rental activity bank statements. We make them focus on the tax return because its a signed document by me, and that document  (the 1040) has an affidavit where you sign that says everything is true and accurate as far as I know, under penalty of perjury. And if I perjure myself against the IRS, they're a government entity, so the crime is on a felony level. 

    Jim Kennedy, CPA

    3Reply
  • Philip Hy
    OP
    Rental Property Investor · Plano, TX · Member since 2015 · 59 posts · 41 votes
    9y

    @Jim Kennedy

    You make a great point about not knowing who paid what if everything goes into the same bucket (one checking account). We've been using an online company called Cozy and we make everyone pay through that site and that helps us track which property's rent has successfully been made. However, I see your point and hopefully our system holds up once we scale up.

    I also complete agree with your point about protecting cash! My understanding of LOCs is that you need to have more significant equity in order to get a LOC (I assume you meant HELOC). Since the properties are so new, there's not much equity there to borrow against.

    If you don't mind, I'll PM you because we're looking for a good investment/BP minded accountant.

    Philip

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  • Jim KennedyPro Member
    Accountant · Cherry Hill, NJ · Member since 2016 · 173 posts · 201 votes
    9y

    @Philip Hy I certainly have no objections. And yes I did mean HELOC, not LOC.

    Jim Kennedy CPA

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