All Forum Posts by: Account Closed

In my profession, I get to deal with both the private sector and the public sector regularly. In audits of most governmental entities, the recurring problem is redundancy, waste, and inefficiency. Why? Because the employees and managers in the public sector really have NO incentive to keep costs under control. In fact, many are based on the premise that whatever they DON'T spend, will be cut from their budget the following FY. This is one of the major design flaws in their budgeting process.

There is waste in the private sector clients as well, but that waste is self correcting, all it takes is a manager who is also a shareholder to see inefficient, and redundant systems costing them out of their annual dividends and the problem is corrected. If they spend more than they take in, they will have to close up shop for good.

I know most of this is basic knowledge for anyone who's dealt with either section, but the question comes down to this. Who do you trust to use your money most efficiently? The private or the public sector? I think the answer is pretty obvious.

For this basic premise, based on my experience in public accounting, I believe we should lower taxes. I'm not saying that lower taxes will create more jobs, but I'm saying I believe it is fundamentally wrong for the federal government to impose taxes on citizens to fund inefficient, non-critical functions. If we limited the federal government to what it was designed to do in the constitution, the required revenue would be a lot lower. That's where I have the problem.

Funding things such as social security makes Bernie Madoff look like a saint. Forcing people to pay in with the threat of prison or excessive penalties would be considered extortion in the private sector. The largest ponzi scheme in history is Social Security.

The cost of compliance with taxation is ridiculous as well. For example, a company that has a 401k plan with over 100 enrollees has to submit an audit report to the department of labor every year. This audit report costs the employer around $10k+ to have conducted, annually. This is $10k the employer must part with that can't be invested in capital expenditures, new labor, equipment, etc. That doesn't even include the taxes paid.

Does lower tax cause lower unemployment? I don't know. But I do know that every $1 taken from an employer in the form of taxation and regulation compliance is $1 that can't be spent hiring new employees. I also know that that $1 taken from the employer, after its run through the government money grinder, will churn out probably $0.05 in "benefits."

Thanks guys, these are great ideas. I'm looking to purchase my first rental here very soon and I'm putting together a list of things to keep an eye out for.

I'm a firm believer in tapping other peoples accumulated knowledge and I'd like to get some feedback from our seasoned landlords here on BP.

We've heard of baby-proofing a house, but what are some things you guys do to "tenant-proof" a house. What I'm looking for is stuff to install during a possible rehab stage that will keep maintenance down on a long term rental unit.

I.E. Scored concrete floors vs. tile, etc.

Any suggestions for us new to the land lording business?

Joe, you are correct, I always get the numbers 1231 and 1250 flip flopped on which is real property and which is assets used in business. I should have looked it up.

Looking back at my original post, I'm not even sure where I came up with that. What's crazy is I worked about 4 or 5 installment sales for a client who was getting the properties through tax lien foreclosures this tax season and selling them on installments and I just pulled up the files making sure I did them correctly and I did them exactly as you outlined. Scary! Not sure where the above post came from...I must have been working on something else and my mind was occupied when I wrote that.

Being down here in hurricane Katrina land, there are issues with depreciation recapture if the property was qualified Go Zone property and the 50% bonus depreciation was taken in year one. If you're not familiar, Go Zone was a stimulus program put in place by Bush to try to attract money to the Mississippi Gulf Coast after Katrina. If you built and placed in service a rental unit that met certain requirements, you could take 50% of the cost off as first year depreciation.

Nathan,

Can you answer a few questions for me so I can get a little better picture of your circumstance?

1. Do you rent the property for 15 days or more a year to a non-related tenant? How many days?

2. How many personal days did you or your relatives use the property?

The answers to these questions will determine wheter the property has tax free income, is viewed as a rental/personal combo, or is viewed as a hobby rental. From there I'll see if I can explain anything better.

At the end of the day, please consult with your personal tax expert. I'm just trying to help you know what questions to ask when you meet with he/she and I'm not giving you tax advice!

Take your accumulated depreciation on the property and the principal collected until you collect what you had previously depreciated is taxed as a Section 1231 Recapture. The interest only payments are ordinary interest income, and finally the balloon payment will be split into recovering your basis, capital gains, and any interest income owed to you. I've seen several clients do these types of sales. If you end up having to reposses the property before the installment sale is completed...well thats a whole different animal.

Example: $100k property with Accumulated Depreciation of $50k, and original basis of $75k. Sales price of $125k.

Y1: $40k downpayment is taxed as 1231 recapture

Y2: Interest Income

Y3: Interest Income

Y4: Interest Income

Y5: Balloon Payment of $85k = $10k section 1231 recap, $25k basis recovery ($75k orig basis reduced $50k by Accum. Deprecation), $50k capital gains. (I'm assuming all interest payments were current to you)

To save yourself the heartache of knowing if you did it right, and to make your life easier in the event the installment sale does not go as planned, please consult with your CPA.

Hope this helps.

If the owner actively participates in generating revenue, then the income is hit with Self Employment tax. In a default LLC taxation structure, there are no salaries for the owners, and the profits are all considered SE income (up to a certain point). With the S-corp or S-corp elected LLC, the owner has the option to save on SE tax by giving him/herself a low salary and distributing the rest of the income as a profit distribution. Only the salary is subject to SE tax. However, the salary has to be reasonable to your industry and an extremely low salary pretty much throws up red flags for an audit.

If the income is all going to be passive, then you've got preferential tax treatment anyway and no SE taxes will be paid so all the LLC does is limit your liability.

Thanks for the replies everyone. Sorry for the slow reply on my end..it's tax season! I am still looking for places to stash my cash away to earn the maximum return while I'm building up my savings, but I have definitely considered the benefits of leverage. I think I would be comfortable with about 60% of the property financed at most and I do see how my returns would be maximized, especially if I'm buying at 30% or better below market value. I'm going to keep playing with some numbers while I'm saving and get in the game as soon as possible.

I'm designing my entire operation to run like a business with everything from marketing vacancies, property management, repair requests, etc. I'm not looking for this income to replace being an accountant for a long time, I'm just looking to increase my net worth over the next 20-30 years. I'd like to be 25 years from now (thatd make me 48 years old) with $5mm in equity and somewhere in the $200k ballpark of annual cashflow. I think this is reasonably possible and I'm trying to do without neglecting 401k and maximizing IRA contributions.

Possible?

You get it!