All Forum Posts by: Michael Plaks

@Ki Lee

There're two separate issues here: operations and legal protection. Legal is for attorneys, and I'm not one, so no comment. 

Banking can be arranged at least 3 different ways, from the simplest to the most professional. 

1. Run everything from a bank account attached to one of your LLCs. Essentially, one of you will hold the purse and be responsible for sharing. Minimal cost and hassle, but maximum risk of internal friction.
2. Open a new bank account co-owned by the two LLCs if your bank allows it.
3. Create a management LLC with its own bank account.

All 3 work for management and for taxes. There very well could be important differences from legal protection angle, so your attorney may scratch some of these options for legal reasons. And, since it is an apartment complex, I would not try so save a few dollars by short-cutting the business setup.

@Alina Trigub suggested consulting a tax attorney. I would not. Those guys are for advanced disputes with the IRS that could lead to litigation. You're not there. Instead, consult tax AND attorney: a tax accountant and a business / asset protection attorney. The former will help with tax planning, and the latter with legal liability protection. Both should be real estate experts.

Frankly, I'm surprised that you're raising these questions after you already bought the property. Better late than never, I guess.

@Craig Smith

@David M. gave you a solid answer, pretty impressive for a non-accountant.

The starting point is to make sure you will have substantial profits from flipping. I hear that this is your plan, and it sounds like you have some real estate experience, so maybe your expectations are realistic. But today is the new economy, and even experienced flippers are facing brand new challenges. 

So, if after deducting all flipping-related expenses, including marketing, driving and everything else, you expect to make more than $50k in the remainder of 2020, then consider forming an LLC and elect it taxed as an S-corp and start a formal W2 payroll for yourself, with tax withholdings etc.

Details matter here, so it's best to consult a tax pro before implementing this plan. Your overall financial situation matters. For instance, if you have a high-paying W2 job, an S-corp may be useless or even detrimental.

If you're not hitting $50k after expenses in 2020, then either start it in your own name or under a simple LLC without any special tax elections. The LLC will then be disregarded for taxes and serve purely for legal protection if operated correctly. Then for 2021, you will want to revisit whether an S-corp or a C-corp structure would be beneficial.

Considering your overall long-term plans, a tax strategist on your team can make a real difference. A collection of random tips from online forums will not substitute for it. You did hire a divorce attorney, I presume, instead of self-educating online. Same here.

As to bookkeeping, you can try to DIY it with something like Stessa. It won't be perfect without professional guidance but it could be good enough, especially considering its $0 cost. Then you would need a good tax accountant to report it correctly, because real estate taxation is tricky. 

The king of accounting is QuickBooks Online, with Xero being a distant second. Neither one should be DIY-ed, in my opinion. Real estate accounting is too complicated, especially with a mixture of flips and rentals, and you're likely to create a mess that would be expensive and frustrating to untangle at tax time. With Stessa, you can still mess it up but at least do it for free. :)

I have not addressed asset protection, and that is a job for lawyers. I'm not one.

@Andy Liu

Exact dates matter. But assuming that you did live there for 24 months and then leased it for LESS than 36 months, your gain is not prorated. You should be able to take the full exclusion, except you owe tax on the depreciation taken over the 3 years.

Again, details matter here. My response was generic, and you cannot rely on it as tax advice. One day can make a difference.

@Matt Henshaw

Yes, you can exchange residential properties into a storage facility. This has not changed.

Just remember that you cannot sell and then start an exchange. Need to start the exchange process before you sell.

@Shawn Long

In Chicago you'd want to reach out to @Steven Hamilton II

@Account Closed

The LLC will not change anything for your taxes. You will have the same write-offs. There is no need to transfer this flip into the LLC, either.

@Todd Groom

Different tools for different jobs.

General tax preparation and tax advice. This can legally be done by people without any license. Among licensed professionals, the choice is between CPAs and EAs. CPAs are licensed in accounting by states - a broad state-specific license. EAs are licensed in taxation by the IRS - a narrow Federal license. Among general practitioners, EAs tend to be somewhat cheaper than CPAs.

Specialized tax preparation and tax advice. In REI, it's absolutely critical to have a specialist. If you compare a real estate CPA against a real estate EA - you will not find much difference in technical competence, services or prices. There're 20+ accountants actively contributing to this forum. Some of us are CPAs, some are EAs. 

Bookkeeping/accounting. CPAs have an edge here, because they are specifically trained and licensed in accounting, and certain accounting tasks require a CPA license.

Defending against the IRS audits and collections. It can be done by CPAs, EAs or attorneys, as long as they specialize in IRS representation. EAs have an edge here because IRS representation is their focus. If your fight with the IRS goes so deep that you are taking the IRS to court - then you need a Tax attorney. Otherwise, they are usually an overkill.

Setting up a business. This is a job for an attorney licensed in your state. However not a Tax attorney, but a Business or Asset protection attorney - a different specialty. You also need an accountant (a CPA/EA if you want a licensed pro) to advise you on the best tax structure, working in tandem with your attorney.

Bottom line: you need a business attorney plus either an EA or a CPA, all of them must be REI specialists. This forum is a great place to find and vet these professionals.

@Jenny Sung

Thanks for the mention, @Basit Siddiqi. Ironically, he is one of the two NYC CPAs I would recommend, and the other one also replied to your post: @Nicholas Aiola.

Thanks, @Nicholas Aiola! You forgot to disclaim personal liability for the consequences of your recommendation. :)

Stay away from getting tax advice to your clients. You're taking a lot of liability doing this, and it's not covered by your Realtor E&O. For tax advice they should not be turning to you but to their tax professionals. And if those professionals disagree, as you mentioned, do you honestly expect to be better qualified than them?

BP books on taxes are OK but not that great, IMHO. Look for books by Stephen Fishman or Sandy Botkin on Amazon.