All Forum Posts by: Michael Plaks

@George Andrade

Methinks you jumped to the conclusion too fast.

Problem: you need a loan for a new business. Opportunity: you have equity in a rental property. You decided to link these two together. 

But have you considered any other ways to fund this business? Maybe there is an SBA loan available. Maybe you can use a business financing company like Kabbage or Fundera (no endorsement, just a mention). PayPal offers business loans to customers, and maybe to non-customers, too.

Then, you might be able to get a business loan from a local bank or find a private investor. All these options need to be compared on their respective terms and risks.

If you really are determined to utilize your property's equity, it may be better to refinance it instead of getting a LOC on top of the existing mortgage. You will probably get a better rate and possibly a higher limit.

Selling the property should be considered from a bird's view. If you did not start this new business, would you keep this property, for cash flow and appreciation? If yes, then you probably should not sell, unless you really are out of options.

@Leland S.

Let me be the party pooper and warn you against a JV with someone you just met. Especially since he may be experienced, as he has contracts and LLCs, while you're not, based on your questions. At least do extensive due diligence on him: background check and ask around in your local REI clubs.

Assuming you do want to proceed with him, the safest thing for you would be to buy this property 100% under your name (or your LLC) and hire him as a contractor to run the deal.

The second best setup is to let him buy the property under his LLC, and you become a lender to him.

Either way, you can still split the profits any way you agree on.

And both ways, do not even think about signing anything without a guidance of a local real estate attorney.

Becoming co-owners/partners is about the worst you can do. It's like moving in with a girl you just met.

@Emily Refi

We don't have enough details about your plans, but your phrase "...SD IRA to use for part of a down payment and rehab" is alarming. It may not be possible to do that.

I will tag our resident SDIRA experts @Dmitriy Fomichenko, @Carl Fischer and @Brian Eastman.

Meanwhile, please clarify what you have in mind.

@Nathan Harrison

If you don't mind Columbus, then @Mark Welp or @Brian M Sweeney could help.

@Sean Sloop

Both you and your relative would likely be in a better position if he was a lender, as opposed to a co-owner. Get a lawyer to draft a 2nd position lien secured by this property. 

Of course, these 2 cents were donated without questioning you on the details of the deal. If we knew more, maybe my suggestion would not be applicable.

It will happen regardless of whether or not you qualify for RE Pro. 

@Greg Tom

About your specific idea to create a management company with losses. One of my pet peeves. :)

Technically, it is workable. Losses from any business other than rentals is usually fully deductible. So, if you have a business that loses $20k while you make $150k at your W2 job - then yes, you will pay taxes on only $130k. 

One little problem here: it's virtually impossible to run a profitable business (again, other than rentals) that shows losses on paper. And if your business is losing money in real life - what's the point of the related tax savings? Spend $1,000 to save $300? It only makes sense if you are in government.

Here comes the flimsy idea of a management company. 

Step 1. Let's create a management company that charges ourselves for managing our own rentals! Not breaking any rules so far.

Step 2. Let's deduct all expenses against that property management income. No problem, either.

The problem comes from the relative numbers. Our goal was to have losses, right? So we will need to have more expenses than income. So we're going to tell Uncle Sam that we're operating a business that consistently spends more than it makes. Uh-oh. I have not seen any legitimate property management company that can operate like this. Have you?

Once the IRS looks into it and realizes that we're managing our own properties - they will call this setup what it really is: a scam. 

Trying to cover it by pretending to also manage someone else's properties is a long shot. And if you do start managing other people's properties for real, then you better start showing profits. In real life and, consequently, on taxes.

@Greg Tom

The discussion predictably went away from your original question, because it's more fun to talk about self-directed retirement accounts. 

So let's go back to your original question. You have a high paying W2 job, let's say $150k (after subtracting 401k). Let's assume your taxes are $30k based on this salary. The question was: can you somehow reduce this $30k using real estate?

Let's be clear and not dance around the bushes. The answer is NO. 

(Note: if the amount was below $150k, you would have some limited room to save on taxes, using losses from rentals. Section 199A would not help you, though)

All other ideas discussed on this thread deal with a completely different question. Which is - can you make money in real estate without increasing this $30k? To that question, the answer is YES. Now we're talking about owning appreciating rental properties with cash flow and investing inside self-directed retirement accounts.

But let's not confuse the two questions: you cannot offset taxes created by high W2 via running a real estate business. Well, if you run your business into the ground and lose a pile of money - then yes, you will also reduce your taxes. Not a strategy I would recommend though.

@Ryan Moore

As long as your lender does not object - a valid concern brought up by @Mark Bookhagen - you do not need any IRS forms. 

What you do need is to ensure that the money you borrowed goes into a separate account used for nothing but your rental business. And from there to closing. It's called tracing rules in the IRS lingo.

Thanks for the shout out, @Nicholas Aiola.

The most prominent REI group in Austin is run by Phil and Shenoah Grove: https://reiaaustin.com/

They have a CPA firm as a vendor, but I cannot remember their name.

This is not an endorsement from me, as I really do not know much about that firm. 

You can also ask in the Austin forum here on BP.

But if you're open to a remote service - any of us tax experts on this BP forum can help.