All Forum Posts by: Chelsea Monk

There are 3 types of income you pay income taxes on in your S Corp.

1. Wages you pay yourself via W-2. You pay employment taxes and income taxes, just like if you were working for someone else, and your Corp pays the employer taxes.

2. Net profit, regardless of how much you took in distributions. If the profit is there, you pay tax on it.

3. Capital gains on excess distributions. So let's say that you started your business with $1k from your pocket and a $50k loan. You profit $10k for the year. That gives you $11k tentative basis. Then you see you took distributions of $40k, which was possible due to the extra cash "laying around" thanks to the loan. You now owe capital gains tax on $29k, which is the amount of money you took out that was above and beyond your "skin in the game."

This is a very high level overview, but I hope you find it helpful. Its not accurate to say you pay taxes on distributions. You pay taxes on income and *sometimes* on distributions if they're in excess if basis.

The more accounts you have to track, the more headache you create.

I'd suggest one parent checking account for the bulk of your activity, then set up another account (or two) and do your own escrow to save for your capex and vacancy, and your taxes (though you should be making estimated tax payments if you're expecting a bill come April).

Also, if you're using QBO, make sure you use Plus so you can turn on class or location tracking in order to track the P&L by property. An alternative would be Xero Growing - it's at least as good (I actually like it better) and significantly less expensive, while connecting to a myriad of useful apps.

Starting under your name is perfect. You should speak with an attorney about whether an LLC is the right move for you, as that's more of a legal move than a tax move since an SMLLC is a disregarded entity unless you file a tax election.

Absolutely, under NO circumstances, should you elect S Corp status without consulting your tax pro. The extra costs for compliance will more than outweigh tax savings if your income can't support the election.

Whoa, three WHOLE spiders? Those poor dears! (<that was sarcasm.)

I step on three spiders every single day on my way from my bed to my coffeemaker. (<that was not.)

When someone starts making petty claims like this, it tells me that they're trying to force your hand on something. Are they trying to get out of their lease? Do they want a rent reduction? Want to remodel? There's something they're trying to accomplish, most people aren't "Karens" without cause, despite what social media generally says.

What does your contract say about breaking a lease early, rental rate, repairs, etc? And as others have mentioned, what does it say about frivolous maintenance calls? This should be nipped in the bud and the PM shouldn't be entertaining calls about wildlife that's less than an inch tall.

@Michael C. this would not be a capital gain situation. This is a situation of purchasing and selling inventory as a business, and would be taxed in the same manner as if you were purchasing t-shirts and reselling them (or vehicles, if you want to get into a higher price point object). Unless a property was used as an investment, it's not subject to capital gains.

The amount you'll pay in taxes will depend on your marginal income tax rate and how your business is structured. There's no canned answer for this, as it depends on your income as a whole and not just the income from your wholesaling business.

However, if you're set up as a sole proprietor (including an LLC who never made any kind of tax election with the IRS), you'll have a 15.3% self-employment tax on the profit from the sale - on top of the income tax you pay. So I'd recommend having a solid 25-30% of your profit set aside to pay taxes purely as a ballpark estimate, and make sure you're tracking all of your business expenses so that your profit reported is as accurately as possible. Working with a tax professional on your actual tax liability numbers will help you nail this down a lot better than my estimate here. Additionally, you'll likely want to make estimated tax payments in order to avoid potential failure-to-pay penalties on underwithholding for tax liability - this is something else a tax pro can help you with.

As far as finding a tax professional, check around with other local investors to see who they use. Another option, if you're open to it, is a remote preparer. There are lots of tax pros around the country who are used to working with investors from all over the US (and even the world, for some tax pros). There's a great checklist in the forums that gives you an idea of what to ask your potential tax pro, and it can be used for a remote preparer or a local one: 

Questions to ask a potential Accountant (biggerpockets.com)

Hope this helps!
~Chelsea

Unfortunately, I think many tax preparers think "a building is a building, it's gotta be simple!" And that's just not the case. I just spent many hours doing depreciation adjustments for someone whose preparer "thought" he knew what he was doing on a multitude of properties. It can get ugly fast if someone doesn't have experience or knowledge.

As Basit said above, there are lots of tax pros on BP who are not only specialists in RE taxes, but are also investors ourselves. This is a great place to start.

~C