All Forum Posts by: Brandon Hall

What is your rationale behind using a C-Corp?

@David Roberts I think you need to do a bit more research about financial operations prior to being worried about a legal entity. It just seems backwards to me that you are concerned with how to structure your business but you don't know what a P&L is.

Regardless, I'd like to offer my two cents. I'm going to agree and say that you shouldn't put your properties into an LLC. Aside from the (sometimes hefty) costs associated with starting and operating an LLC, they may not provide you with the asset protection you think you have. Rather, you should consider setting up a separate LLC that partakes in property management activities and have it handle everything involving the flow of money and tenant management.

The problem with putting each property into an LLC is that each LLC must operate as a separate business from the others. Any co-mingling of funds can result in loss of protection through "piercing the corporate veil." This means you can't mismanage your LLCs AT ALL.

As a means of protecting both your personal assets as well as your equity in the rental properties, you may want to set up a separate LLC to serve as the property manager for your properties. It would be responsible for collecting rent, paying bills, and maintaining repair of the properties, etc. Importantly though, it would bear the potential liability to any tenants, etc. rather than you personally or whatever entity that actually owns the real estate. This way, you have a clear business operating and should something go wrong you will still be able to protect all of your assets.

I'm going to take the other side of the argument here and say that you shouldn't put your properties into an LLC. Aside from the (sometimes hefty) costs associated with starting and operating an LLC, they may not provide you with the asset protection you think you have. Rather, you should consider setting up a separate LLC that partakes in property management activities and have it handle everything involving the flow of money and tenant management.

The problem with putting each property into an LLC is that each LLC must operate as a separate business from the others. Any co-mingling of funds can result in loss of protection through "piercing the corporate veil." I've also been told (though not confirmed) that a competent lawyer can argue that your property is not actually a business and hold that the LLC is a sham.

As a means of protecting both your personal assets as well as your equity in the rental properties, you may want to set up a separate LLC to serve as the property manager for your properties. It would be responsible for collecting rent, paying bills, and maintaining repair of the properties, etc. Importantly though, it would bear the potential liability to any tenants, etc. rather than you personally or the LLC that actually owns the real estate. This way, you have a clear business operating and should something go wrong you will still be able to protect all of your assets.

Of course you can also pick up a good insurance policy.

The profits will be taxed as short-term capital gains which are taxed at your ordinary income rate. To be considered a long-term capital gain, you would need to hold the asset (a note in this case) for more than one year. At that point you would be taxed at 0, 15 or 20% depending on your income levels. 

And I agree with @Steve Buchanan in that if you are putting up all the money, you should have a much higher payout. You are the one taking all the risk and should be compensated as such.

@Nathaniel Busch is spot on. It sounds as if you would like to drastically reduce your taxable income and the best way to do that (with real estate) would be to have your wife classify as an RE Professional. If she can do this, any RE loss can be deducted against your W-2 income. I would like to add two things to Nathaniel's post:

1) In addition to your wife working at least 750 hours, 51% of her time must be dedicated to real estate activities and she must meet an ownership test (must own at least 5% of the company if she is an employee).

2) You must file jointly. Even if your wife qualifies as an RE Professional, you will not be able to deduct the losses against your own income if you two are filing separately.

In addition to what Hattie said, I'm also questioning your 6% mortgage (seems high to me) and I'd look into lowering your home's tax assessed value. 

From the IRS: Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.

I'd be careful hiring your friend. If I were in your shoes, I'd want to avoid the possibility of him being classified as an employee. The headaches it may cause likely won't be worth the savings. Here's a good link regarding contractors vs. employees: http://www.sba.gov/content/hire-contractor-or-employee

There is no way to avoid paying taxes on sales of stock unless you sell the stock at a loss. Selling securities creates a taxable event and the IRS will want their cut, regardless of what you plan to do with the proceeds. 

There are two types of stock options that you will be concerned with: Non-Qualified Stock Options (NQSO) and Qualified/Incentive Stock Options (ISO). 

NQSOs, once vested, allow you to exercise the option at the exercise price. The exercise price will be at a discount to the market price of the stock that day. The discount is known as the "bargain element" and this is considered ordinary income. You will owe tax on this ordinary income immediately. Should you hold the stock and see it appreciate, when you sell in the future, you will also owe capital gains which will be the difference between the current stock price and the market price on the day you exercised your options. For example: Exercise price $20, Market price $30, future sales price $35 - You owe tax on ordinary income of $10 ($30 - 20) per share immediately, and in the future you will owe tax on $5 ($35-30) per share of capital gains.

ISOs, once vested allow you to exercise the option at the exercise price. However the difference here is that the "bargain element" discussed above does not immediately create an ordinary income tax liability. You report taxable income only when you sell the stock. If the sale occurs more than two years after the grant date and more than one year after the exercise date, you can report your total gain as a capital gain. This will allow you to drastically reduce your tax liability compared to NQSOs. It does get a bit complicated if you sell prior to the timeline I mentioned above and ISOs may create an alternative minimum tax (AMT) liability. However targeted questions will get you the answers you are looking for.

Let me know if you need any more help.

You don't need an LLC to be legitimate. You can name your business and operate as a sole proprietorship and avoid the costs and potential registration/upkeep headaches that come with a different entity. Adding "LLC" to the end of your name, for example: Hall & Associates vs. Hall & Associates LLC doesn't really add value in my opinion.

LLC's are meant for asset protection. They are pass through entities, so you can record the same expenses *David listed as a sole proprietor. You don't need an LLC to do these things.

In my mind there are other ways to make yourself sound/feel/look legitimate, specifically being extremely knowledgeable about your business. Being young won't be the cause of you not making deals.

You lost me on your appreciation number of $163,000. Can you explain where you are getting that from?