All Forum Posts by: John Gillick

Quote from @Steve Vaughan:

Hopefully nowhere. 
All this will do is take that wonderful passive income and turn it into ordinary earned income, subject to self employment taxes. 
Keep it simple.  

Not quite.  It takes an avoided passive expense (avoid property manager), creates a passive expense (property manager) and simultaneously creates an active income (self-manager LLC).  That active income will be offset by the active expense (e.g., computer) of the LLC that would otherwise be a passive expense against the passive income of the property.  To the extent FICA or SECA is involved, I'm already over the cap via w2 work so the bulk of it is not relevant and with careful planning, there should not be much actual net income.

Now the computer is an active expense, not a passive expense, and can be written off against substantial w2 money.  One must now also account for hobby-classification rules and some other rules, but again, a significant net benefit can be created in particular situations with particular rules.

I largely agree with you though: Keep it simple!  I've done that for 20 years.  It worked very well.  However, given my current tax burden and particular life situation, there is enough benefit to complicating things to justify the cost and time burden.

Quote from @Seidy Lasker:

@John Gillick

With the last one, you’d be transferring passive income into self employment income with higher taxes.

 That's true for all but the "high taxes" part.  There are special rules for employing your children.  0% tax for their standard deduction, %0 for pre-tax exclusions (e.g., 401(k)), no FICA, etc.**

**As with all tax issues, there are complicated rules that are very situationally and fact specific, but these rules exist if done correctly.

Quote from @Michael Plaks:

Here is the right sequence of prioritizing:

1. Lifestyle considerations

2. Business considerations

3. Tax considerations

Never put #3 as #1.

Anyone who thinks 3 is a separate, lower priority to 2, instead of an integral subset of 2 is not the accountant/advisor for me. Tax considerations are no less important for ROI than property tax and vacancy rates. Your own analogy proves my point: I know I have never bought a cake with no icing on it, and I do not think I have even seen a plain cake being sold in the grocery store or bakery.

"creating an LLC does not create any additional tax deductions for you."

Well, while not literally true, your point is understood, and yes, an LLC does not convert any non-deductions into deductions, but I put enough detail in my example that one could easily understand how it would in fact create a deduction-based tax benefit.

"Buying a condo out of town for tax purposes is not a tax strategy, it's foolishness. Buy it if owning a condo in that place is a solid investment AND you don't have better investment opportunities in your home town or elsewhere. Tax benefits are the icing on the cake, not the cake. And there're complex rules if you're planning to use that condo yourself periodically."

I would say ignoring or even deprioritizing a major portion of ROI is foolishness, but everyone is allowed their opinion.

"You employ your children if they can be helpful in your business AND you want to raise them as productive members of the society."

Thanks for the parenting advice, but if you read the question carefully you'll see I was looking for tax advice.  Wrong thread, wrong topic, wrong forum actually.

Quote from @Allan Smith:

Accountant counts beans. Codes transactions. Reconciles. 

you need a cpa for tax strategy. Higher pay grade.

 Oh, sorry.  Yeah, all my accountants have been CPAs.

I have had a lot of accountants, some good, some bad, but none of them will do anything but paperwork.  

I'm ready for an aggressive accountant.  

Where are the accountants that are going to tell me how to write off vacation expenses by buying a condo in the same city I like to vacation?

Where are the accountants that are going to recommend I employ my children so they can have 401(k)s and I can expense their salaries and they can contribute pre-tax?

Where are the accountants that are going to tell me how to stop managing my own rentals, and instead form an LLC so I can pay myself to manage them while writing off other LLC expenses like my computer?

I'm not saying I need to be all the way through the gray area into the black, but I'm tired of hanging out in the white area.  Let's wade into that gray area.  Keep it legal, keep it aggressive.

Tax question. If you and a friend have a 50/50 LLC and you drive say 10 miles to check on the venture, is that $5.80 mileage expense:

a. an expense put on just your K-1?

b. an expense put on the LLC's tax form (8825) and split 50/50 on the partners' K-1s?

c.  other?

Context: I'm considering my first partnership. It's a place that is a couple of hours drive from me and a couple of hours flight or my partner. He has every right to come to inspect and work on the investment and deduct his flight, etc. but I really don't want to pay for half his flight, nor do I want the benefit of half that deduction. Can we put things like payments to contractors on the LLC's expenses and keep things like travel on our separate K-1s?

Originally posted by @Tom Gimer:

@John Gillick They will resell the property first. If it sells for more, that answers the deficiency question. If it sells for less, well, that plus the terms of sale pretty much prove the case.

They would certainly have a good long laugh about your demand letter.

Originally posted by @Bryan S.:

Thank you Peter. My purpose for reaching out to the community was to find out if anyone had been through a similar experience, but you are correct and we are reviewing our options with legal counsel. I appreciate everyone who responded. 

 Definitely, need that advice from a competent local RE attorney.  But based on what you said I personally wouldn't be too concerned.  First, as always, threats are cheap, 'suits are not.  Second, if the market is strong like you indicated and you're walking for "complicated" (I read that as "personal" reasons), then their damages won't be very high.  Third, your attorney can look over your contract to advise you not only on your potential liability but your potential remedies.  I'd write back to the bank, "Thank you for your letter.  Please be advised of my intention to sue or counter-sue for breach of contract as your extreme delays amount to a failure to fulfill your duty to perform in good faith.  Your failure to perform has cost me X hundreds of thousands of dollars in lost profits, but I'm willing to settle this matter for a mere 100k and a return of my deposit."

(This is not legal advice, but when lawyers misbehave my natural inclination is to misbehave reciprocally).

Two things:

1.  In my day job, I buy things that transact like portfolios of commercial real estate but are not actually real estate.  Every single broker has said they have other offers.  It does not change anything.  Sure, if I was allowed to see the other offers or know for sure there are no other offers, that would change my behavior as a potential buyer, but they'll never be allowed to show me other offers (NDAs), so I am absolutely forced to assume they are all lying, even though only a fraction of them probably are.  Because of that, it's completely pointless whether you say it or you don't, because the potential buyer you say it to will (1) assume you'll say that whether it's true or not and (2) never have any way of confirming it.

(Now, maybe in RE there's some law or ethic that will let you actually confirm it, IDK).

2.  How could there ever be a situation in which there were not multiple offers?  If I was an agent and I wanted there to be multiple offers I'd just let potential buyers know that the seller is looking for offers, any offer.  An offer could be "I'll take your house off your hands for you if you give me six billion dollars."  I imagine it would be unethical for an agent to ask someone to make a sham offer, but you can always get offers and saying "we have other offers" says nothing about how good they are.

(Sure, you can make an I'll pay 1k over the next highest offer up to X, but if I was the seller I would reject that.  I'd counter with $X.  You might walk out of spite, but I now know that $X is a price people are willing to pay, so while risking that you were the only person willing to pay that, I'd keep looking for someone else to pay $X).

Long story short: say whatever you want, the buyers assume you don't have other competitive offers, and if you want to be ethical, just get more offers, it's easy if you let people know you want to hear all offers.

Well, the only way I know of to avoid that tax is with a 1031 exchange and you had to have found a new place within 45 days of selling the old one, so "2 months ago" was too long to wait.

Hopefully, a RE CPA will reply with a better answer.  Good luck.