All Forum Posts by: Michael Plaks

@Jeff V.

I'll start with CPA involvement. Each accountant has his own business model. Those who only prepare tax returns charge you for that service specifically. Expecting him to include year-long support and tax planning for free is not fair. Those accountants usually offer tax planning consultations throughout the year, in addition to tax preparation. Again, it's another service, and it is usually charged separately. This should make sense if you compare this to how doctors charge.

Then, there is a continuing service model. You pay a monthly subscription fee, and it covers tax preparation, tax planning, help with IRS issues, and a variety of other services - for example, bookkeeping is sometimes part of the deal. Several accountants here on BP operate on this model. My firm is among a few that offer both models.

Next, bookkeeping. Finding a competent REI bookkeeper is ridiculously hard. I know, because I've been continuously looking for them myself, and have found very few. The problem here is that REI bookkeeping is VERY different from traditional bookkeeping. If you're a consultant, a Realtor, or a retailer - the bookkeeping is a straightforward task. You can use various accounting software out of the box, like QuickBooks or Xero. You can use a variety of emerging cloud-based solutions that provide a cheap bookkeeping platform, often with backend support by accountants a phone call away. And, of course, you can hire any traditional bookkeeper and expect the job taken care of.

Not so with REI bookkeeping. Traditional bookkeepers, including those with the high-end credentials and certifications and years of experience, attempt to handle REI business as any other business - resulting in a total mess, unusable for tax preparation. I taught a 2-day (that is 14 hours) seminar on bookkeeping for investors and their bookkeepers, and we only cover fundamentals. Yes, it is that complex if you do it right. 

Even core REI stuff like rental properties, repairs, escrows, etc. stumps most bookkeepers. Add to that hard money, JVs, owner financing and especially notes - and you should not be surprised why finding a good REI bookkeeper is more difficult than finding a good REI accountant or lawyer. The real good ones are super-busy and expensive. Most others are waste of money, frankly. Speaking from (extensive) experience.

To make things worse, there is almost unavoidable disconnect between bookkeepers and accountants - unless they have a business relationship and worked out their differences one-on-one. 

Recommendations? Your best bet, in my opinion, is to work with a REI accountant who provides bookkeeping services in-house - either an actual day-to-day bookkeeping or an ongoing review of your books. The second best option is to find a REI accountant who has an established relationship with an independent bookkeeper and endorses that bookkeeper's service. The remaining third option is to pay your current accountant (or whoever you choose as his replacement) for a detailed review of how he wants your books organized, and specifically your more complex deals - and then try to carefully implement his blueprint either yourself or thru some bookkeeper.

There is one unacceptable option, practically guaranteed to lead to frustration and an enormous waste of resources. It is to adapt someone's bookkeeping system (there're several on the market) and then expect that your accountant will be able to work with the results. Chances are - he won't be able to, unless you go to the same accountant who created the system in the first place. Which happens to be my recommended option that I already mentioned anyway.

I realize this message is not what you want to hear, but it is the true state of the industry. 

Maybe it's not the best analogy, but looking for "the right bookkeeping system" without having it approved by your CPA beforehand is like picking the best furniture for your house without consulting your wife. :)  Good luck.

@Marquest Page

Retirement account cannot help you reduce taxes when you're wholesaling to pay your bills. Until you make enough to pay your bills and still have profits left. Those extra profits can be channeled into a retirement account.

Your friend is talking about doing deals inside self-directed IRA. In other words, your IRA/401k is acting as an investor, not you. And since your IRA/401k is the investor, profits go to the retirement account, not to you. You cannot use that money.

His strategy is great, but not suitable for you, I believe. Of course, I'd need to learn more about your situation before giving specific advice.

Free consultations are usually offered by newer accountants who have more time than clients. In my firm, for example, my staff can give you a short free consultation, but my personal time is not available for free. Each firm has its own policy, of course.

@Charles H.

Start-up costs ARE deductible - but after the business starts. If it's flipping/wholesaling - could result in a deduction right after the business starts. If it's rental properties - then added to the cost of the property, which becomes deductible in the future, via depreciation.

@Wendy Carpenter

In real estate business (any business, really), you constantly have to choose between DIY, cheap help and expert help. Creating an LLC is just one such decision. Other examples are: creating your marketing pieces and website, finding your leads, structuring your contracts, managing rehab, managing tenants, bookkeeping, tax preparation and so on.

Every time, the decision is based on the importance of doing it right, risk of doing it wrong, and potential savings from shortcuts. 

If your LLC is holding a rental property - there is a legal liability risk. The bigger and riskier the property and the more you might lose if things go wrong - the more important it becomes to have the LLC set up tight. Then you need a local attorney to set it up. Local or at least very familiar with your local laws.

If your legal protection is not that big of a deal - then an off-the-shelf LLC might do. Online outfits do not customize LLCs for your business and your specific circumstances, of course.

In short, compare the risk of using an imperfect LLC against the savings from forming it online.

@Ken F.

First, the new law. Not knowing your numbers, I can only speculate. But I'd speculate that $10k limit may not be your problem. The doubled standard deduction could swallow your property taxes anyway, with or without the $10k limit.

Second, regardless of the above, I would not be placing that much emphasis on deducting property taxes while evaluating home ownership. It's a lifestyle decision first, including security/mobility, wealth building decision second, including appreciation and liquidity, and only then current tax deductions might come into play.

Third, you want to utilize your home equity for real estate investments. Sure, makes sense. But you don't have to sell to access your equity. This can be accomplished with borrowing against equity, still deductible by the way if used for business.

@Charles H.

The short answer is no. It sounds like you're in a preparation stage, and your business will not really start until 2018. Your costs are what are generally considered to be start-up costs, not deductible until the business starts.

If you were starting a wholesaling or flipping business, you could accelerate the start date by launching your marketing next week. However, you mentioned that you're looking for rentals, and that pretty much closes the door on doing it clean.

Then, you could consider doing it in a risky way: the way you suggested. It would be essentially creating a fake marketing company that would only serve your own future business. Two problems here:

- it is a stretch at best, and could be construed as something worse

- businesses with zero income and substantial expenses are the favorite lunch of the IRS

So, I would not recommend it, generally speaking. That said, your personal tax accountant could find it acceptable, after discussing it with you in details, in your specific situation.

@Brandon Heimsoth

Congrats on your 4-plex. I believe you approach organizing your bookkeeping backwards. You plan to organize it first and then present to your CPA. I suggest the opposite: discuss it with your CPA before you start, not after you finish.

No matter what we could suggest to you, your CPA may want it done differently. 

@Marquest Page

You're saying you already have a double closing scheduled next week. I assume that you're a wholesaler on this transaction. If this is correct, then retirement accounts cannot be involved in this deal. Two reasons:

1. Your IRA/401k would have to be who the purchase contract was with. By now, the contract is signed with you personally. Too late to change that.

2. Even if you did structure it originally with your IRA/401k, your assignment fee would go into your retirement account, and you would have no access to this money, other than to reinvest into the next deal. Cannot pay your bills with this money. And I presume you're working on generating some spendable income.

IRAs/401k (especially 401k) are excellent tools for tax-beneficial investments, but you need to devise a strategy first. You need a real estate savvy accountant.

Congrats on your successful deal. Many more in 2018!

PS. Even as is, retirement account could possibly help you with your 2017 taxes. Again, find a good tax accountant. There're quite a few of us here on BP.

I don't think the answer exists as of now. The language of the bill is not clear on this, at least not to me. Could be interpreted both ways. My interpretation is based on the general intention of this reform to avoid retroactive application. In multiple instances, they specifically protected transactions consummated before the bill was finalized. 

People who converted to Roth in 2017 did so in expectation that they could recharacterize, up to extended deadline of 10/15/18. If recharacterization of 2017 conversions is prohibited - it would seem to be an instance of retroactive application. That's why I hope that the new law applies to conversions after 2017, not recharacterizations after 2017. But I can't be sure. I'm pretty sure that ultimately we will have Regs clarifying it.

As of today, I agree with you: it is safer to recharacterize conversion that already lost money, before the year ends.

@Ashish Acharya

I probably don't agree with not converting to Roth or reversing the conversion already done. What if I expect a higher income next year, for example? I can also split the conversion between the two years, reducing the combined tax hit.

The way I interpret it is that recharacterization of 2017 Roth conversions is still allowed. Otherwise it would be essentially a retroactive application. But I'm not sure, and the future Regulations should clarify it eventually.