All Forum Posts by: Costin I.

@Basit Siddiqi can you please elaborate  a bit on the statement: "You also may be transferring income that is passive rental income to active ordinary income that may be subject to self-employment tax." ?  How/when/why would that happen? Thanks.

@Basit Siddiqi - makes sense, but even then I want to know who signs my return and speak with the person who prepares my taxes. I want my CPA to be familiar (if not downright intimately familiar) with my situation, my finances, my domain of activity and my goals. Will you get that kind of attention from someone handling 695 clients? Or even 100 clients? If every year there are different people preparing my taxes, would I get "continuity" in tax strategy?

Maybe I have too high expectations and we are talking here only about tax filing preparation - like the difference between the CPA helping you improve the bottom line of your business activity and just saving you the few hours time to figure out the IRS forms in April. In which case, I still refer to "CPA is just a tool, you need to learn to use it". Or pay a lot for the convenience of ignorance.

From an asset protection perspective, your asset holding entity should be separate from your property management and operations entity. 

Holding LLC is just keeping title to the property (how many properties per LLC is depending on a series of questions - look into Series-LLC if your state has them). Ideally with a layer of anonymity provided by a land trust. No public interfacing, nor operations. It has a property management contract with the Operations LLC.

Your Operations LLC is the public facing one - it does the repairs, hiring the contractors, dealing with leases and tenants. It has minimal capital reserves.

For tax purposes, you can treat them as disregarded entities and all net flows to you.

Yes, the administration is more involved than having everything in your name, but you need proper bookkeeping anyway.

PM me and I can send you my notes on asset protection (primarily for buy and hold investors) that includes entity structuring, protecting the corporate veil, transferring and due-on-sale clause, when to do it, checklists, etc.

Hey @Alex M., you spoke with the head of a tax firm, not with your future CPA. At 695 clients, the only wealth building going on is for the CPA - there are 2080 working hours in a year, divided by 695, that's 2.99 hours per client per year. I think a 1040EZ will take longer than that, nevermind a complex return with multiple investments, properties and deductions. Most likely you'll be passed to an "intern"- the answer to these questions should tell you everything you need:

• Do you outsource any of your work? Do you perform the work personally? If not, what is the review process? Who signs the returns?
• Will you represent me before the IRS?

The normal rate for a CPA to be available is a direct relation to how much you are willing to pay for his time. A good one will give you answers to short questions (email or phone) that will not take more 15min of his time for free. Anything more than that and you'll be charged their hourly rate. If you are lucky, if they don't know the answer, you'll not be charged for them to do the research (basically, you'll not have to pay for their education).

Andersen Advisors are very expensive. Search the forums for Andersen Advisors and Coon and you'll find plenty of mentions about interfacing with them and how that interaction went.

@Scott Smith is an asset protection lawyer - knowledgeable and fast, but not a CPA. We worked with Scott and recommend him. He might have a referral for a good CPA.

Another couple things, IMO:

• the chances that you'll find a CPA that will do the work for you (versus one that will work for you) are slim. Most CPA are just a tool that you need to learn how to wield. Their work will be as good as your preparations. Their answers will be as good as your questions. You still need to learn what applies to your domain of activity and prepare for that (e.g. proper recording and documentation for deductions) and ask them (often in different forms) how to implement something - a good starting point is Nolo's Every-Landlords-Tax-Deduction-Guide. The reasonable priced knowledgeable CPA that works proactively and inquires about your business, progress and status throughout the year is a unicorn - if you find one, please send us his contact info too.  You might have to find a tax strategist separately from a tax preparer.
• Besides the reasonable fee for preparing your tax return (and that is another discussion, dependent on the complexity of your tax filling) your CPA should save you in taxes 3-4 times his fee. If you are paying him $1000 to tell you how to save $500 (note: save, not deduct) on your taxes, you are in a losing relation. Or in other words, if you are paying him $1000, and assuming your tax bracket at 25%, he should save you $4000+ from taxes - otherwise you just pay for his Mercedes.

I'm very curious what are the thoughts and experiences of other investors in this matter, if they agree with the above or contrary.

Well @Jennifer Beadles , that's where I was going with my question - it takes time to form "the team". You can't gather an agent, a contractor and a property manager and then declare "ok, ready, let's get some deals". You need to get going and doing and kissing lots of frogs in each segment before you'll have your "team". And good contractors will go bad, lenders will not give you the best rates and deals on consecutive deals (or you'll be naive to stick with one when competition exist and not shop around for best offering at that moment for that type of deal), and HMLs come and go.

Like you say, one has to work "really hard to find by asking for referrals, calling around, and getting to know overtime" and "the hardest part of out of investing is to find good people you can trust".

So @Juan A. Padilla , start networking, go to all the meetups you can, and more important, get deals/properties. The "team" will emerge later - you don't need a full Rolodex, you'll figure things while doing. 

Oh, one more thing: there is no such thing as "investment savvy agent to source deals" - not in Austin metro area. An agent relies heavily on MLS to source their deals, and want their commission (which means you'll pay at least 3%, if not yet listed or 6% if already listed and with a seller agent), and their deals will most likely be closer to full retail than investment grade. But I might be wrong and look forward to someone to correct me and point me to such unicorn.

@Juan A. Padilla @Jennifer Beadles When you say "REI Team" and "Investment team" what/who/where exactly do you have in mind for that? People that are working for you, people on standby, ready to work for you or just connections, a series of contacts?

Ok, that changes things - you need to be concerned with both "internal" and "external" attacks. An LLC will protect you from "internal" attacks - a tenant suing you for a rental deficiency, a contractor for hiring/payment/accident problem, etc. It will not protect you from when you crash your car into someone and/or destroy their million dollar Bugatti (hopefully you'll have enough auto insurance for that, plus a good umbrella policy) or from someone suing you in your physician practice - which is an "external" attack to the LLC and rental. In a case like that, I think everything you own is up for grabs and you need more protection.

Again, I'm not a lawyer, so you need to consult an asset protection specialist. I can send you my notes from my extensive research for asset protection primarily for a buy&hold investor, and primarily for "internal" attacks (and that should give you a better understanding on insurance, entity structures, DOS, checklists, etc.) and give you my referral for an attorney.

Normally, my recommendation would be to apply the "2% rule" - the cost of setting up and maintaining your asset protection should be less than 2% of equity you are trying to protect. Let's say, it costs you 1.5K to get your structures in place (holding LLC or Series-LLC, with or without land trusts, with or without separate operations LLC) and 0.5K per year (for maintaining the LLC properly, bookkeeping, lawyer and CPA, etc.) for a total of 2K. You should have 100K or more in equity to protect before it makes sense to spend that money - compare that with how much you spend in annual insurance for the same property/equity.

But then again, you should be equally concerned probably with external attacks, in which the considerations change and you need to consult someone specialized.

Are you going to have a lot of equity in your new investment? Do you have many other properties with a lot of equity to protect? If not, an LLC might be overkill and all your cash flow will go to setting up and paying for the LLC, lawyer and CPA. The note itself is a form of asset protection - there isn't much to collect if you have little equity.

You should read Every Landlord's Property Protection Guide: 10 Ways to Cut Your Risk Now - you need to implement this anyway, before looking into complicated/expensive asset protection structures. 

You don't need an entity to be able to use deductions on your taxes - but you need some sort of business income (e.g. can have a rental producing rent income), the taxes and deductions will flow through to you. If you don't have a rental, all your expenses before getting one are considered startup expenses and are limited in amount and scope.

If you get an entity (most likely an LLC since S and C corporations are not suitable for buy&hold real estate), then you can start deducting all your business expenses - although most likely accumulating deductions till you'll actually have some income to apply the deductions to it. You need income in 3 of 5 consecutive years, otherwise, IRS will qualify your "business" as a hobby.

Read NOLO's Every Landlord's Tax Deduction Guide. And since most likely, next question you'll bump into will be the asset protection one, read also Every Landlord's Property Protection Guide: 10 Ways to Cut Your Risk Now. 

@Matthew Kreitzer how much would cost whatever documents/processing/time/resources to "survive a Motion to Dismiss" and to prepare and conduct the "Requests for Production of Documents", and who would support such costs (you the attorney or the client)?