All Forum Posts by: Dan Schwartz

@Robyn Joy

Ask the tax preparer if your property qualifies to be reported on Schedule E.  Notwithstanding the advantages @Dmitriy Fomichenko mentioned, you will pay less in current taxes on Schedule E vs Schedule C. There are tests to determine which way your situation can be reported; ask your preparer to do this properly and at the greatest legal advantage to you.  

Make the greatest legal use of Tangible Property Regulations as you can.  Under certain circumstances, you can expense property in the year of purchase rather than add it to your basis and depreciate it over a number of years.  Make sure your tax preparer is taking advantage of this to the fullest legal extent.  

@Gabe Gunter and listen to every single word @Steve Vaughan says.  Every single word.  Seriously.  

@Gabe Gunter the "problem" with corporation entities at your stage is, in my opinion, the corporate formalities and filings that you'll need to do, whereas an LLC has little-to-no such nuisances (varies by state). Tax-wise, the S Corp lets you structure your income (talk to a CPA, of course) in an advantageous way, even if many advisors don't feel it's necessary to elect S Corp until you are making $50k+ per year (everyone's advice is different; I've seen this threshold a few times).

One often-overlooked detail in this is that you'll have to file an 1120 or 1120S each year in addition to your 1040. As a single member LLC without S Corp election, everything would be on your 1040. The 1120/1120S will be an extra expense come tax time (maybe $500?...call around for estimates, which are hard for these forms because no two businesses are alike), unless you prepare your taxes on your own. It's possible to self-prepare, but the entity tax returns aren't quite as simple as the 1040 can be. (They don't take a rocket scientist either, but just be aware of what you're getting into).

Lastly, I believe the $800 minimum CA tax is for both corporations and LLCs. Don't quote me on it; check the FTB website to confirm. It is a minimum tax, so it may not matter if your entity, as a business resident of CA, generates >$800 in business tax liability per year. For your second and subsequent entities, should you have them, you'll need to start weighing whether the additional minimum tax burden is smaller than the benefit of a separate entity. That's down the road, though. If this is your first and only entity in this trade, keep the corporation (or LLC, if you choose to re-organize) and pay the tax. You are in an active business and will likely benefit from the protection of limited liability. This is where the attorney's advice is crucial. Many on BP will say you don't need an entity, but they may not be in your particular shoes. To each their own.

@Gabe Gunter the best advice is always to get your team together and work out the kinks before you start. But sometimes, time and money dictate a “ready, fire, aim” approach.  Only you can decide which one works best.  

I will say that when I started my non-RE business, I met with a business attorney (who we already knew, thankfully) for about an hour.  I used the pages of notes and suggestions and “things to think about” for a good two years, as and when needed.  I couldn’t possibly remember what that consultation’s fee came to.  It didn’t break the bank at the time, and it wasn’t significant enough to leave a lasting impression of having been a burden.  But the concepts and ideas and “beware of”s that I wrote down proved invaluable.  Again, good luck!

@Gabe Gunter

In many states, you need a real estate license to manage other peoples’ property.  Is that the case in your state, and if so, do you have a license?

You “incorporate” as a corporation and are taxed as a C Corp by default.   You have to elect to be taxed as an S Corp.  This may be what you’re doing,  but if you are concerned about conserving money when consulting with lawyers or CPAs, you would lose time by not having an understanding (in their terms, if possible) of what you are looking to accomplish.  

I haven’t found that business credit without looking at your personal credit is as easily obtainable as some seminars make it out to be.  Or at least not in sufficient quantity.  You might start with AMEX if you haven’t already.  

Good luck with the new venture!

@Account Closed if your actual costs (excluding prepaids) are $4k and your monthly interest savings is $180, shouldn’t your break even be 22.22 months, or under two years?

So what if “it takes years”?  If it’s right for you, do it.  

@Stephanie Reinagel. good plan.  I would scour the forums for any feedback from people in our metro.  It used to be that you'd make the revenue you needed for the entire year (or more!) in February and March (Phoenix Open through Spring Training).  With those events curtailed for now, different strategies are required.  I can't personally offer any current advice, as we made the decision in Nov 2019 to convert from Airbnb to long term rental.  But surely there are others with their finger on the pulse locally.  You have to get some local opinions in addition to the success stories people have shared from other places.  Good luck!

@Khushi Bahut no problem.  If by Net Operating Losses you mean Passive Loss Carryovers, those should all flow to your Schedule E, offset any income there, and then ordinary income on the 1040.  The details of accounting for this transaction tax-wise are surprisingly complex, given capital gains, capital gains exclusions, potential depreciation recapture, passive loss carryover, etc.  Read up on it carefully, but do seriously consider having a professional guide you through reporting this properly on your tax return. 

@Stephanie Reinagel are you looking to buy in Phoenix/Scottsdale market, and do you plan to operate it yourself?