This week I went to the Apartment Owners Association trade show and networking event. Lot of older rich landlords and tons of vendors for everything your land-lording heart could desire. There were engineering company's, eviction services, Coin-op washer/dryer purchases and leases etc, the full gamut.
One of the vendors, a licensed tax preparer, captivated us all with her seminar entitled "you can write off almost anything". Needless to say the hosting room was nearly full with every type of REI participant. Much of what she said is common knowledge for in us REI and we already know; however, something she said gave me a little twitch.
She said, you, as an RE investor, need a business other than your property as your business. Insomuch as, the business of land-lording cannot be your only business.
I thought this to be a critical nugget that many RE investors might miss. She went on to say that whatever the business, it needs to be linked to income, which can be tied back to your RE endeavors. So, property management, construction, etc, and related expenses can be written off on your taxes; another nugget.
In order for the IRS to recognize you as being in business your need to have the ability to link money to a source\an activity and once that is accomplished you can begin to write off expenses that are ordinary and required for your business.
Now, I'm sure i am butchering the quote, but I think the just of it has been conveyed.
Now, my question is, if my first business is land-lording and my 2nd business is, lets say flipping, or wholesaling, do I need to have separate everything; i.e. bank accounts, corps etc, following her logic, to apply her interpretation of the tax code correctly? Of course the best person and most qualified to answer the question would be the person who said it but, it was no way I was fighting the mob of ppl rushing to talk to her.
I would set up a separate LLC for each entity you hold, with a separate bank account and tax return. In Utah, the renewal fee for an LLC is only $15 a year. I'm not sure what your State requires. Of course this is a better question for an attorney, but that is my opinion. In addition, when you get to multiple properties and mortgage notes, etc., you may consider a business that owns all of your LLCs, such as a family limited partnership. This FLP can further limit liability and can actually protect your equity in each property. It took me awhile to find the right people to work with in Utah. Good luck finding the same in your State.
Some years ago, I thought I could save big money on legal and accounting fees. I asked a bunch of very experienced RE investors some questions along the lines of what you are asking here. I summarized all their answers and pulled out the common "facts". I used these facts to create my corporate structure. I set up my LLC's and a trust and got my book keeper to keep the records. I felt great - I saved a ton on fees!!
Fast forward to filing time. I sent my accounts to my CPA with a note explaining what I had done with the book keeper. I was ready to accept his praise...."Paul, you are a genius, you don't need me, you are so smart and talented and gifted". Oh yes, I was excited!!
He sent me a 1-line response.
"I can see what you are trying to do with all the entities but its not that simple - we need to meet". In the end, we had to re-work the entire thing. I kinda understood what I was doing, I had even done it kinda right....but kinda is not good enough. What applied to the guys whose ideas I copied didn't really apply in my situation. What I thought were "facts" were only facts for them - not for me. So we had to start over. It ended up costing me more than I would have paid if I did it correctly the first time.
I learnt the lesson the hard way. Yes, legal, accounting and tax fees feel like a painful waste of money...but the alternative is much worse.
Sketch out your structure then go see a CPA who invests in RE. Pay the fee and sleep well at night!
Tax solutions and business structures are not a one-size-fits-all, cookie cutter approach. It's a bit like diagnosing a stomach ache. Your particular stomach ache could be anything from gas to a heart attack and an apendectomy is not going to fix your stomach ache, even though it was the perfect solution for the stomach aches of hundred of thousands of stomach ache sufferers.
Sit down with a competent CPA. He/she will ask you about your business, your short term and long term goals, your retirement plans and a host of other questions. They will also get a feel for your personal tolerance for handling complications. If the best solution for you is a very complicated structure and the CPA gets the feeling that you won't manage that structure competently and will likely get yourself in more trouble, then he or she may recommend the second best solution for you that is less complicated, but still solves the majority of your problems.
As a young 20-something just starting out, your solution is going to be much different than the 50-60 something getting close to retirement. Somebody who is still working a full time day job with a non-working spouse might have a different solution than a single person. It's about goals and current situation more than anything else.
People seem to be approaching taxes and business structure as there being One Right Solution (tm). It simply isn't the case.
Great points all, thanks for the feedback
@DarrenEady We have to be pretty strategic when opening and operating legal entities her in California; fore in my state, there is an $800 tax, many say cost of filing or filing fee and this is even before you disclose your income to be taxed. In essence, its a cost of existing as an entity, and that is an across the board, LLC's S-corp etc.
@Paul Birkett very true. I went ahead and paid, what I thought to be an exorbitant amount of cash and got advise from the licensed professionals. Both my education from the school of lessons learned and mentorships have taught me that its better to pay upfront then later; most often when we pay later its worse. Also, I know the general information that we get from the guru's are just blanket strategies that are more like the cookie cutter approach to business and make for great taking points but, may or may not be applicable to everyone's situation, just like @Linda Weygant said.
Working with my accountant and lawyer have been most rewarding and have given me peace and a better outlook on what i need and don't need.
I was more curious as to how everyone else felt about what this particular tax pro stated and how it worked in the lives of others.
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