All Forum Posts by: Michael Plaks

There are several threads discussing Anderson on this forum. For example, this thread.

@George Leeman

1. You're trying to find a solution for a problem that you do not have. The S-corporation + W2 salary technique is used to reduce self-employment (Soc Security / Medicare) tax. You do not have self-employment tax, to begin with - because rental properties are exempt.

2. Whatever you put your properties into - LLC, S-corp, or nothing at all - will not change the taxation of the income: it is taxed as ordinary income, not capital gains.

3. The income itself (rent) is not taxed. What is taxed is net income: whatever is left after subtracting all expenses and depreciation. You may not have much income, and maybe even zero.

4. There is no Trump's $9,000 tax deduction. It was probably a number from someone's illustration about the new 20% deduction - which may or may not be available to you. Either way, an LLC or an S-corp changes nothing.

5. The S-corp is indeed a bad idea for rentals. The blog post suggested by @Natalie Kolodij lists only one of the drawbacks, and it also has a bad example (the 2-yr move-back strategy described there does not work.) Either way, don't do an S-corp for rentals.

6. You may want to form an LLC or multiple LLCs (or a Series LLC if your properties are in one of the states that allows them, FL does not) - but not for taxes, for legal protection. This is something to discuss with an attorney.

Overall, you're trying to over-complicate your setup, and you're confusing some concepts. I recommend you talk with one of us tax experts, so we can suggest the right structure for your business. You said you don't have any - but there are some 20 of us here on this forum, working nationwide.

You may think so. What matters, however, is whether the IRS agrees with you. :)

Managing just one property, unless it is a MF or commercial property, almost certainly won't qualify.

@Wai Chan

You do qualify as a pass through entity, however it does not mean that you will have any deduction. More likely no than yes. Here is why.

1. The deduction is not 20% of the rent. The deduction is 20% of the net income, after all deductions, including depreciation. For most single-family landlords with mortgages this net income is actually negative, so there is no 20% deduction.

2. The deduction requires that you are a "trade or business." While it is not defined, the common understanding is that having one rental property is not enough to pass this test. We expect some clarifications from the IRS, which may or may not come.

@Richard Olshove

Accountants are easier to find. There're about 20 of us here on this forum, working nationwide.

One attorney I can endorse is John Hyre.

@Steve Genna

Two of the NYC-based real estate CPAs on this forum are @Nicholas Aiola and @Taylor Brugna. Two NJ-based CPAs are @Jay Patadia and @Simon Filip.

With today's technology, however, face-to-face is really not necessary, so if you want more choices - you can consider any accountant from this forum whose posts you like. We all are real estate experts and work nationwide.

@Richard Olshove

Instead of trying to figure out the consequences of this particular structure (seemingly influenced by a certain national promoter of over-complicated structures), I recommend you pay for two consultations with two experts:

1. a real estate accountant
2. an asset protection attorney

Does not matter which one is first, but you need both, and both should have multi-state experience.

Good entity structuring is always case-by-case, as it depends on:

• your current REI holdings
• your future REI plans
• you current and future overall financial situation
• involvement of other people
• your risk tolerance
• your risk exposure
• your overall asset protection plan, which is more than entities
• your overall attitude towards complexity and hassle
• your support team
• and more

This particular structure can help in some cases and hurt in others. A lot more needs to be discussed for a responsible advice.

@Dimple Khurana

You already got advice from two accountants, and I'm the third. Whatever the three of us say is pretty much irrelevant, since we are not attorneys, and this is a legal issue. You mentioned having heard "various things" - which is exactly how it goes. Everyone has an opinion about legal protection, just like about dieting or economy.

Here is the bad news. Lawyers notoriously disagree about asset protection, too. Ask them - they will confirm. If you talk to Attorney A, he may say do this. You go to Attorney B for a second opinion - and she says the exact opposite of the first one. You go to Attorney C to figure out which one was right, and he gives you a third opinion, contradicting both A and B. Not trying to be funny, it is the reality.

Hence my advice.

1. Ignore opinions of everyone except attorneys, and specifically Kansas attorneys. 

2. Make sure that the attorney you talk to is familiar with Kansas Series LLCs. It does not matter whether she is for or against them, but she needs to know enough about them to have an informed opinion.

3. Do not attempt to seek a second/third opinion. Find one attorney you like ans trust and just follow his advice.

4. Remember, as already mentioned, that whatever structure you create, it requires work and discipline in operating it.

@Mayer M.

Also, LLCs cost money. Not a fortune, but nevertheless. In NJ, you will have to pay $50 annual report fee and $250 minimum annual tax ($125 per member), plus an initial fee to register ($125). 

Make sure you get expected benefits in return.

@Kyle Pierce

Unless he lends you his retirement money, as @Carl Fischer suggested, which indeed is not taxed when received (and possibly never) - then he receives interest. Technically, it is called "portfolio income" and is taxed at ordinary rates.

Your lender probably confuses business income with ordinary income. Business income is taxed higher, but his income is not business and won't be taxed higher than ordinary rates.

The only things that are taxed lower then ordinary income are long-term capital gains and C-corporation income. The first one is impossible in flipping, and the second one is really complicated and only works under specific circumstances.