All Forum Posts by: Basit Siddiqi

I do want to add 1 item

If you are a NY resident and are a member in a multi-member LLC(taxed as a partnership); NY will require the partnership to file a tax return with NY.

The NY Partnership can essentially be blank with no NY income. NY wants the partnership return to be filed so they can track how much income its residents are earning.

This can be considered a "fee" since it will cost your accountant extra money for this filing.

@Nick C.

Hi Nick - Do you find it that Lenders charge you less in fees as you do more you deal with them?
Do you have an example of what fees you paid to a lender the first time you worked with him and what he charged on future projects?

@Jason Hirko
Thank you for your response.
From my understanding. It is not a hard money loan.
The terms are 5 years at 5% amortized over 25 years(not happy about the term or rate in addition to the fees)

I am located in New York and the property is located in Allentown, PA.

I am not necessarily mad at the guy trying to make money. I guess my expectation was that the loan fees was going to be less. I am a new real estate investor with only 1 property. In my first deal - I paid $1,100 in loan origination fees and I got a $500 gift card at closing(mortgage to me personally instead of to an LLC in this situation).
If I learned anything - Its to request a good faith estimate earlier in the process.

Since you mentioned its not excessive - I guess I can sleep a little bit better and not worry and just focus and moving ahead.

Thank you!

Hello Everyone,

Backstory
My 2 friends and I created an LLC to acquire real estate via financing.
We got into contract with 2 houses with a purchase price of $115,000 and $112,500.

We communicated with a lender(or so I thought he was a lender) who said he would be able to finance our projects.
2 weeks in and we find out that he found us a lender; so he acted as a mortgage broker.
I think his company couldn't finance our project and he still wanted to see if he can get paid on our project.
We recently got a good faith estimate from him and the fees seem excessive. Mostly because he's getting a fee for brokering us a lender. I am disturbed because his website shows him to be a lender and not a broker and I never signed any mortgage broker agreement.

anyway the fees are as follows.

Loan Origination fees - $3900($1,950 each)
Processing Fee - $995
Lender Fee 1% - $1,820
Lender Document Prep - $350

Furthermore, the lender he found us is providing us 1 loan that will blanket both properties. This guy still is adamant on charging us twice the loan origination fees.

The other fees are standard 3rd party fees not paid to lenders(appraisal, title, recording, transfer fees) that I found to be standard.

My last question would be - He said he reached out to 3 lenders; of which 2 said no before the final lender said yes(he said the lenders lend to LLC's but wouldn't lend to us because we were out of state investors). Is he required to answer who the other 2 lenders are if I ask?
It would make me feel better to know I got some information in exchange for the fees he's charging.

I would greatly appreciate everyone's feedback!

@Scott Perkins

Congratulations on having 4 rentals and a flip under your belt.

As Daniel Mentioned above - It is not advisable to hold rental real estate properties inside of a corp. Losses can be trapped inside of a C-Corp. Also, appreciation is taxable in exit opportunities if you distribute it to the shareholders.

However, flips can be beneficial if done inside of an S-Corp. The reason for this is flips are subject to self-employment tax and an S-corp can minimize some of these taxes.
However, you have to acknowledge that having an S-corp adds fees(such as setting up an S-corp and annual tax filings). so it may not be advisable to set one up unless you expect to make $40,000 in flip income.

Holdings rental property as a sole proprietor vs inside an LLC provides no tax benefits. It may provide some asset protection though.

Please let me know if you have any other questions.

@Riley Kuranishi

Adding foreign investors into the equation definitely adds some complexity.

A lot of foreign investors do not want the extra burden of having to file a tax return.
forming an LLC(or any partnership entity) with the foreign investors as direct partners in the partnership entity will require the foreign investors to file for an ITIN(mentioned above) and it will also require that the partnership withhold taxes inbehalf of the foreign investors and remit it to the IRS.
Failure to do so would result in the partnership paying any tax in behalf of the foreign investor if he fails to file a US tax return.

In large deals - I see a lot of foreign investors pool money inside of a corporation where the corporation invests the money into the partnership. This avoids many of the headaches described above but does have the additional filing requirement of a corporation return.

@Diego E. Ramírez

I'll try to tackle the questions 1 by 1 since it seems like you had many.

"I want to know if I need an LLC for my investment property in Miami?"
You do not need to hold an investment property within an LLC.
LLC's are used for asset protection. Holding the property in your personal name or within an LLC entitles you to the same deductions.

"depreciated my own house?"

You are not allowed to depreciate your house(unless you use a portion as a home office).

"home office depreciation"

If you have a portion of your home that you use exclusively for a business; you are entitled to the deduction.

"Mortgage insurance deduction?"

if you are paying mortgage insurance and your AGI is below a certain threshold; you are entitled to the deduction.

"I have 2 roomates and I want to know if is better to add them on my taxes to increase my Salary"

I am not sure what you mean by this

When looking for a CPA - you should be mindful to find a CPA that specializes in real estate and one that is familiar with the state laws of where you live and where your property is located.

You can find a CPA in the marketplace here at biggerpockets.

Basit

@Fredie Robinson

It is always preferable to get someone local because they are more likely to know how to properly file your state/local tax return properly.

If I am not mistaken - Louisville has a local tax return in addition to filing a Kentucky state tax return.

In regards to bookkeeping - You want to make sure that your rental activity and personal activity is kept separate. Have a bank account(and credit card) that you use only for business. this makes tracking expenses/income easier.

As you progress in your rental career - you may want to outsource the bookkeeping so you can focus on more important items that would grow your business.

Does he not want to provide the full tax return because he does not want you having access to the sensitive information on it(Social security number of himself and others(if partnership))?

If this is the case - maybe you can ask him for the specific form that shows the rental income/expenses(Schedule E if personally owned or form 8825 if held inside of a partnership).

If he doesn't want to provide the form at all - I would think it to be a red flag and he possibly inflated the expenses on the tax return.

@John Lee

Holding RE in a Corp(S or C) is normally a bad idea because it limits your exit opportunities. Transferring the RE to the shareholders will trigger capital gain(if held in a partnership it would not trigger a gain).

onto your question.
If the person is being paid is an officer of the S-corp - I would switch him to receive a W-2.
If he is not an officer - I would look to employee vs independent contractor laws to determine if w-2 or 1099 is appropriate(does the s-corp provide the tools to the shareholder to do his job, is anyone else reviewing his work, etc).

Ultimately - The IRS is getting their money. The 15.3% payroll tax is being paid to the IRS.
Treated as employee - S-Corp pays 7.65% and shareholder(contractor) pays 7.65%
Treated as contractor - Shareholder(contractor) pays 15.3%

If the payroll taxes was paid by the S-corp - it would be considered a business deduction. 

I hope I answered your question.