All Forum Posts by: Andrew Reyes

Hi @Michael Wagner,

In many cases a property producing positive cash-flow can simultaneously produce tax losses. This is due to non-cash deduction (i.e. depreciation). In this case you get the best of both worlds: cash flow to reinvest and tax losses to reduce your tax liability on other sources of income. Hope this is helpful.

Generally:

NOI - Cap Ex - Debt Service = Cash Profits

NOI - Depreciation - Debt Service = Taxable income

Most non-residential real property is depreciated over 39 years so 2.6% of your purchase price is taken as a tax deduction in each year. Residential is slightly accelerated to 27.5 years so 3.63% of your purchase price.

Assume the following: $100 acquisition (4 cap), 2x debt-coverage ratio and no cap ex. NOI is $4 ($100 * 4%) per year, debt service is $2 ($4 / 2) leaving you with $2 ($4 - $2) of cash profits. $2 of cash profits are further redacted by $2.6 ($100 * 2.6%) of depreciation resulting in a tax loss of $0.6. Add some 0s to the end of these numbers and you may be able to see how being a real estate professional is beneficial.

Additionally, if you have a cost segregation study you may be able to categorize some of the $100 purchase price to shorter life assets resulting in greater tax losses in the earlier years.

This example is illustrative so speak to your tax professional to understand the application to your specific situation.

Hi @Kevin Brown,

I do not see the gift tax issue. Based on the information you provided, it sounds like you plan to acquire a 50% interest in the property. This would most likely be a taxable sale for your son. If he will have a gain (i.e. proceeds in excess of basis) there are ways for him to defer or exclude this gain in the year of sale.

Gain on sale of residences may be excluded from income.

1031 exchange and QOZ may allow him to defer the income to a later year.

Engage a tax professional as there are many details that need to be worked out in order to qualify for any deferral or exclusion transaction.

@Heather H.

The resources you referenced focus on investing in a QOF, which appears to be a requirement of the law. The requirement to substantially improve the property is imbedded in what a QOF is:

In order to qualify as a QOF, 70-90% (depending on structure) of an entity's assets must be "qualified opportunity zone business property", which  is either "original use" (hard for real estate to qualify unless new construction) or "substantially improved" (see IRC 1400Z-2(b)(2)).

@Megan Hirlehey I generally agree with @Ashish Acharya, but let me address a few point/questions that you brought up in your post:

"My question is, what are the tax/legal implications of taking withdrawal (not a loan, this money will not be returned to my own LLC) from my LLC to use as my half of the seed money for the new LLC?"

This actual depends on the tax treatment of your LLC. As @Ashish Acharya pointed out, by default, an LLC is disregarded as a separate entity form its owner, if it has only one owner, which based on your post I assume is the case. Alternatively, you can elect to treat your LLC as a corporation for tax purposes, which may have some tax implications. In general a distribution from a disregarded entity is not considered income to the person receiving the distribution because the owner is treated as owning directly all the assets of the entity, so from a tax perspective this is the same as if you withdrew money from your own bank account. Distributions from corporations however, may be taxable to the person receiving the distribution if the corporation has positive earnings for the year.

You should confirm that your LLC is disregarded for tax purposes.

"I have not generated a profit yet in my own LLC, so the money that I would be taking from it is basically a portion of the seed money for that account. Would I have to pay any kind of tax on this since it isn't "income" or if I do, will it cancel out as the money is going right into another investment?"

As indicated above, distributions are treated differently depending on how your LLC is treated for tax purposes. As you brought up "income", I think this is a good time to mention that if you generate positive taxable income as adisregarded entity you will pay tax on that in the year earned, regardless of distributions. However, if you LLC is treated as a corporation, the LLC would pay tax on the income in the year earned. If you then made a distribution out of the LLC taxable as a corporation you may have dividend income, which is then taxable to you. This is what most refer to as "double taxation". For this reason, taxable corporations are generally inefficient form a tax perspective for US residents. Foreigners may be able to benefit from using structures that income taxable corporations, but that is another conversation for a different day.

Regarding your "canceling out" comment, I would rephrase that as "can you deduct the cash investment in LLC 2 against the income (if any) on the distribution from LLC 1". You should note that LLC 2, as it has more than one owner, cannot be disregarded. Rather it can be either a partnership or a corporation for tax purposes. Either way, your initial contribution would be added to your basis in the membership interest, which is not currently deductible (read as: no you cannot "cancel out" the income from the distribution). You will be able to net this basis against any sales proceeds, if you sell your interest in the entity.

I will reserve comment on piercing the corporate veil as I am not an attorney.

Either way, you should (always!!) speak to your tax adviser on this (any) issue as every taxpayers personal situation is different and you may fall into traps that you are not aware of.

Good luck on your new investment and I hope your initial investment starts performing soon!

Greg Kendall another thing to consider is whether or not this property is inventory, or a capital asset. The industry term for this is “dealer property” there is a great deal of case law on the issue as to what you should be considering in performing this analysis. If the property is treated as inventory, the gain is ordinary income, not capital gain. A conservative approach is to hold the property 2-years post completion to treat it as a capital asset. You should speak to your tax advisor on this issue as it is a complex analysis.

Thank you, @Karen Schimpf. In the case of a $1,000,000 at a 4% fixed rate 10 year term and 30 year amortization is the math that you figure your monthly payment and interest as if the loan term is 30 years, but there is a balloon payment in year 10 for the remaining principal balance?

Based on my calculations I would expect this loan to produce the following metrics over the 10 year term:

Interest: $366,405

Payments: $577,005

Remaining Balance: $789,400

What are market rates and LTV maximums on commercial multi-family?

Thank you, Curtis Rouse . I am familiar with most valuation metrics and want to start learning about different operational consideration in the multi-family context. Any insight into how operations differ in a 5-unit compared to a 50-unit for example?

Thank you, Michael Le . So all 5+ properties are valued the same (based on NOI and cap rate?). What would differentiate a 5 unit from a 50 unit? I assume operationally, you could support full time staff at a 50 unit property. What would be the smallest multi family that would require and could support full time staff?

Hi All:

I understand (and please correct me if I am wrong) that 4+ and under 4 unit properties are viewed differently (why?) is there a difference in terms of valuing or targeting different ranges of units per property?

Hi Chris Rand , In general, the above posts are accurate. Rental income, like almost all income is taxable. I note that you asked specifically about “cash-flows”, which has multiple components each treated differently for tax purposes. In general, you can start with NOI, next you have debt service and cap ex, which can get you to cash-flows. The interest portion of your debt service is tax deductible (possible subject to limitations) and the principal portion is not because you get basis in the asset for the loan principal, which generates a depreciation deduction. Similarly, cap ex is generally not deductible currently but the expenditure is capitalized and depreciated, similar to the initial basis in the asset. In summary, you have cash and non-cash tax items that cause your taxable income to differ from your cash-flows and taxable income * tax rate determines your tax liability. Speak to a well informed tax profession in your area. Every person’s tax considerations differ so you would need to hire a well informed professional to get specific advice about your scenario. Best of luck!