All Forum Posts by: John Briggs

From personal experience as a CPA dealing with the IRS, unless your tenant agreement/rental contract is iron clad, the IRS will make you claim the deposits as income. So i would be careful Kyle Meyers. I know proper accounting rules allow you to claim the the renters deposit as a liability. (Regardless if you have a seperate account setup for it or not). IRS will find a way. It's better to just claim it as income when you get it and claim it as an expense when you pay it out. (Or you can pray you don't get audited which is never a good strategy in my mind.)

QUicken is not made for businesses. I would use Quickbooks Pro if you are looking at a software to use. Regardless of state law, a series LLC or just a management company that owns a bunch of single member LLCs(SMLCCs) is a good move. I am not an attorney, but i think if a tenant or some crazy wants to sue, i'm not sure the personal assets would be protected. On another note, IMO, I would rather have my primary paid off and have a mortgage on my investment properties.

As a real estate business owner, you keep books for two reasons. 1) so you can see the profitability of each property or deal or investment, etc. 2) for tax purposes. The IRS has a big problem when a "business owner" is using their personal account for both personal and business stuff. In an audit, it gets very messy because the IRS wants to count every deposit as taxable income and every payment/withdrawal as a non-tax deduction.

You are making the right move by opening a business account. If you like using a credit card, I would recommend either having a personal card designated as your business card used solely for business expenses or get a small business card and of course use it exclusively for the business. Adding one credit card isn't that much extra work to keep track of your expenses.

As far as savings accounts, that is more a personal preference and depends on your goals. If your goal is to take 10% of your profits and re-invest it, then I could see it being a good idea to transfer that money out to a seperate account until you are ready to invest it.

I wouldn't worry about the tenant deposits. I would claim it as income in the year you get it and then expense it when you pay it out.

Hope this helps.

I have a client (i'm his CPA) that does the same approach you are talking about. After two years of using this strategy, he has 5 properties and cash flows about 3k per month on those 5 properties. He does the occasional flip as well. I know that two years ago, he lost money on his second deal, largely due to the contractor he used. But he continued with the strategy after realizing where he made a mistake. He is an appraiser by trade and I'm sure that helps him understand the value of the houses and where to put money.
So for what it's worth, the strategy works if done right.

Charles Perkins, it's semantics. We are saying the same thing. Ron expressed how he likes not having the debt over his head. I was simpling communicating that there is nothing wrong with his philosophy. Just as there is nothing wrong with your philosophy. As for the tax savings, I was pointing out that when only looking at a mortgage interest deduction, you build wealth faster by not paying someone else the interest even if you are stuck with a higher tax liability.
I agree that through leverage and the velocity of money, you can build wealth faster than if you pay for the entire property in cash. But i also know many horror stories of "investors" who did not do it the right way and over leveraged themselves and lost everything, including their primary residence. Of course, they didn't have such a wonder group like BiggerPockets. Alas!, we don't know what we don't know. :)

I have said this on a few other posts, but cash flow always beats out perceived tax savings. And nothing can beat peace of mind. You generate more wealth by having a paid off mortgage than the tax savings you get from a mortgage interest deduction.

This may be a good opportunity to find out why they were late so you can know if you may need to find new tenants. Especially if is now a month to month contract.

I agree with the previous comments. I never advise my clients to make decisions solely because they will have a better tax deduction. A tax deduction is also not dollar for dollar. Cash is always king. Your positive cash flow from the property is much more appealing than the dollars saved on taxes because you have a mortgage interest deduction.
One thing to keep in mind is that depending on your AGI in 2013, passive income will be subject to another 3.8% medicare tax. That will be on top of the taxes you already pay.
Jake makes the best point though, no one can really answer this question without knowing what your goals are.

It looks like i'm a little late to this thread. A lot of the advice has been great. So I just wanted to throw in my two cents on some of the things discussed. If you are flipping houses and plan to do more than 2 per year, an s corporation is my preferred entity because the IRS will view your properties as inventory and the income you make on it as ordinary income. For the properties you plan to hold and rent, the LLC whether multi-member or disregarded is my preferable choice. I also agree that if you are just starting out, i wouldn't worry to much about the entity selection until you have actual profits from either renting or flipping.

Steven Hamilton II, you mentioned you use a C corp when profits are high. Can you explain why that is your preferred method?

I appreciate your advice. It is always good to see how other people do it. As to the mission of the NP, i'll quote the articles for you. The purpose is to "provide low income and homeless persons, potentially homeless persons, or otherwise disadvantaged, poor and distressed persons with housing facilities and educational and supportive facilities."

The attorney we used did 90% of the setup and IRS application. He did an excellent job of disclosing everything and I guess I'm the type that feels as long as we follow the tax code and law, I'm not worried about audit red flags. Certainly, if the audit red flag provides little to no benefit to the client then I will avoid it. But in this case, my clients NP will provide a great retirement option when he decides to slow down. In addition, it will be a great opportunity for his children to learn good work ethic and the importance of charity as they grow older. My client 5 years ago was homeless himself. Now, after he sells his company next year, he will be a liquid cash multi-millionaire. It's an amazing story and he wants to help others the way he was helped when he needed it.