All Forum Posts by: Bob Norton

@Rick Hoffart Rental losses between related parties are generally not deductible.  

@John Thedford They hold up in Louisiana.  I guess it depends upon the circumstances and the state.

@Cody L. Prepayment penalties and late charges paid to banks are consider interest expense.  When you pay off the loan, any costs to pay off that loan are deductible in the year it is paid off.  If you refinance the loan, then you will need to amortize the financing fees of the new loan, but not the loan that was paid off.

@John Thedford @Ron Alexander My understanding is that a single-member LLC has the same legal protections as a multi-member LLC, as long as you treat it as a separate entity from yourself, with a separate bank account, separate bookkeeping, separate insurance, etc. It is only disregarded for tax purposes, which is an IRS rule and does not affect its legal status. If single-member LLCs did not provide any legal protection, then no one would set them up. You should confer with an attorney about this, since I am not an attorney. The attorney will recommend that you get the proper amount of liability insurance, but you should have that anyway. Moving money into or out of your LLC does not invalidate its legal protection since members can make contributions or distributions at will. What you want to avoid is paying your personal expenses directly from your LLC, so distribute the funds to your personal account first and classify the transfer as a distribution. As for reactivating an old LLC, if it costs the same as setting up a new one, then you could do either. It may be beneficial to reactivate it, so that you can claim the earlier formation date as the founding of the company.

@David Nacco Home offices are considered commercial real estate for depreciation, even if they are in a residential building.  So, you have to depreciate them for 39 years. 

@Freeman Schultz A landlord's income is the rent he/she collects, minus the related expenses he/she pays out.  They get to keep whatever is left over.  From that amount, they subtract depreciation on the property to arrive at their taxable income.  So, depreciation shelters some of the cash flow from taxation.  Rental income is passive income, so the landlord is only taxed at his regular income tax rate.  If he/she pays him/herself an actual "salary", then he/she will also pay an additional self-employment tax.  There is no reason a landlord must pay him/herself a salary.

@Gordon F. Keep in mind that the people you are contacting are financially distressed and probably not willing to admit it.  You should approach them as someone wanting to help them.  (If you have this mindset, then you may come up with solutions that work for both of you.  This will come from experience.)  People in foreclosure are generally wanting to avoid talking to anyone that appears to be a bill collector, so dress casually.  If they answer the door, tell them that you are looking to buy a house in the neighborhood and ask them if they know anyone that is wanting to sell.  If they talk with you, then work on getting to know them and building rapport.  I don't recommend approaching them with the info that you know they are in foreclosure.  Your wholesaler is using you as @Aaron K. said. However, it doesn't hurt to work with the guy for a short period of time to see if you like it. Then, go out on your own. You can setup an LLC once you've determined that this is a business that you want to be in.

@George Mill We use this strategy all the time in Louisiana.  Down here we call land contracts "Bonds for Deed".  This strategy is generally used with a balloon payment in 3-5 years so that the buyer/tenant has time to clean up their credit and qualify for a mortgage.  Personally, I would only use this strategy with a property that I do not want to keep long-term.  At some point the property will transfer to your buyer/tenant and you will no longer have a cash-flowing property.  

@Carson Smith @Jaysen Medhurst Actually, you might be able to claim the Sec 121 exclusion for the portion of the sale of a 5+ apartment building, if you lived in one or more units as your personal residence. The apartment complex would have to be in your name and not in an LLC. The apartment building is considered a residential building for depreciation purposes, so the fact that lenders consider it to be "commercial" is not relevant. Sec 121 does not preclude taking the exclusion for a residence in a residential apartment building, only the portion of the building that you used for business purposes, such as renting to others or a home office.

@Kat Rathell Will your existing duplex cash flow? Have you considered refinancing it to pull out your cash, so that you can keep it, and use your cash/HELOC to fund the next one?

Since you have owned the property for less than 1 year, you will taxed at regular tax rates.  If you can hold it another 5 months, then sell it, you will pay capital gains rates.  Depending upon your tax situation, you may even qualify for the zero capital gains rate.

A 1031 exchange is an option, but as @Bill B. pointed out you'd be paying high fees to delay a small gain.

You should definitely review your situation with your CPA.