All Forum Posts by: Justin Freeman

I agree with Ed. I began investing 9 years ago with a duplex here in Bangor, I'm a CPA professionally and passively invest on the side. The last year and a half we went from those 2 units to 48 units in the Bangor area. I've looked in Southern Maine and regionally and yes our prices are depressed comparatively but it still might not be a "deal."

Our firm has been getting involved with some tax attorney's out of Boston that are involved with it and I think we're going to see some pop up over the next few months.

You're spot on on with the mechanism for funding the partnership, generally a limited partnership or Corporation is used for the entity vehicle (it doesn't have to be real estate it can be a non-real estate business also). The key is, not only do you have to purchase a property, but you also have to invest in it, which for some can be read as investing an equal amount as the purchase price. So for someone that owns 100 shares of IBM Stock or really any other property, who doesn't want to pay current taxes on realized gains, they can fund and improve the property or business within 180 days of the sale and potentially defer tax until 2026 AND reduce their gain by a percentage, generally 10-15% depending on the holding period. 90% of the assets in the partnership/corporation must be invested into the QOZ to qualify. 

The cooler part is that the appreciation on the property owned by the partnership/corporation is tax free assuming you hold the property or business for greater than 10 years. So if you have $250k into a property and in 20 years you sell for 500k, the $250k gain is potentially tax free.

You're spot on regarding the regulations, final regulations haven't been released but I had a conversation with the IRS as well as with the attorneys we're working with and they suggest the same thing, setup the entities in accordance with the rules written, regardless of the vagueness, and if regulations come down that are contrary to partnership agreements, corporate resolutions, etc. then we'll need to amend documents as necessary. According to the IRS though, this isn't one of the major areas there pushing for final regulations  at this point due to the upcoming tax season and the larger components of the TCJA regs that need to be worked on affecting, essentially, the entire country.

One last note, the Zones require an annual self-certification process which will need to be completed, so keep that in the back of your mind when you consider doing this. 

Justin Freeman, CPA 

I'll echo Nicholas and add this. CPAs want to build and maintain a relationship and have a full understanding of what you're doing, how your doing it and how they can best provide value to you. Building that relationship and an understanding of your unique situation in the middle of tax season is nearly impossible. 

@Nicholas Aiola, you make some great points about the new 199A deduction. We've started talking to clients about this point exactly. I agree every situation is different, but we've found especially at higher incomes, the SE Tax savings moving to the S-corp still seems to be too much to cover even with the 20% deduction. At lower income thresholds, I agree it gets much closer, but you worry about a year that pops.

For example, net income before wages is 100k. As a single member LLC I pay, let's say 11% net for SE Tax after the deduction for taxes. So SE Tax is 11k + taxes on 80k of income (100k-20% 199A deduction).

If I'm an S-Corp and take a 40k wage. My payroll taxes, again net 11% are 4,400. My income tax is based on income of 88k ((100k-40k)×80%)+40k taxable  wages.

At those numbers it's hard to offset the SE tax with the reduced deduction. The key is going to be getting wages as close to 40%  of QBI as possible so we don't limit the deduction or reduce it too much, that's going to be the biggest planning piece this fall is getting wages where we need them especially in single owner, single employee businesses. 

Best,

Justin  

I am an investor here in Bangor, I use Maine Real Estate Management, they have been great to work with. 

Hi All,

The answer is, it depends what you're doing with the property. A flipping entity, I almost exclusively choose an S-Corp as it allows you to control self employment income in a reasonable manner. If the entity is used to purchase and hold real estate long term as a rental, as long as the rental remains just that, a rental, I normally go the Partnership LLC route as income from rentals is NOT subject to self-employment tax and the LLC is generally an easier vehicle to work with than an S-Corp. There's other factors, but from a tax side those are generally my biggest concerns.

Justin Freeman, CPA

Hi Roger, you can continue to "trace" interest still. So if you use your HELOC for a business or a rental, the interest can be traced to the appropriate schedule. The tax law changed the deductibility of personal interest as reported on Schedule A, Itemized Deductions, hope this helps.

Jim, I have to disagree.

In our CPA office, yes we have individuals who we train input the standardized data. W-2's, 1099's etc. Then we move it up the ladder for businesses and rentals to an individual who is more advanced. Finally it is reviewed twice, once by the CPA who manages the client relstiomship and knows the "going ons" and secondly by a technical reviewer.

The reason is two fold. First everyone along the chain is asking questions to make sure the client is thinking of everything and we haven't overlooked something which is where I disagree, I find this a value adding activity. Secondly a return prepared at the partner level is going to cost somewhere between $150-$200/hour in our area. By pushing the work to the appropriate staff level we can keep costs modest. 

Hope this helps define how a CPA firm works or the ones I know of generally. 

Justin 

Also remember, CAPITAL gains are not an additional tax, it's a specified rate so it's not a second tax. 

Troy is on the right path for the S-Corp. The key is the compensation "self employment income per se" has to be reasonable according to the IRS, so it's not quite whatever you want. One of the biggest audit risks of an S-corp is the reasonable compensation piece as the IRS understands people use it to skirt SE tax. Also, the income does not have to remain in the Corp, it can come out in the form of distributions not subject to SE Tax.

In a simplified manner I also agree with Troy regarding partnership taxation and the implementation of SE Tax for all income to all partners, however there are situations where investment partners may not be subject to SE Tax. Fairly complex rules govern this.

As a CPA, I generally push my clients to the S-Corp for a flipping entity, especially if they are going to perform multiple flips in a year. It's just another tool we use to control SE Tax at the end of the year.