All Forum Posts by: Paul Sundin

Just curious if anybody who went to this event has any thoughts or comments?

I am working with an investment group who are looking at a portfolio of single family homes located in Lorain, OH.  Now I have many clients who have bought in the Cleveland suburbs and am somewhat familiar with the surrounding areas.  But not so much with Lorain.  I just want to see if anybody has experience in the area and can offer any guidance on the market.  

Specifically, I want to know:

1) how strong is the resale market

2) how strong is the rental market (I know a couple companies just announced layoffs)

3) I know that a POS inspection is required but not sure if anybody has had experience with the local housing authority

Any other info is greatly appreciated!

You are correct that any tax is based on the "net" profits of the flip.  However, some flips can be taxed as capital gains.  It just depends on the circumstances.

People who buy and sell (or “flip”) real properties often call themselves real estate “investors”. But this may not be a correct definition in the eyes of the IRS. The IRS will often seek to determine whether these taxpayers are operating as “dealers” or “investors”. Should you be classified as a dealer, you are deemed to be in an active trade or business and will be taxed at ordinary income rates plus self-employment tax.

When you look at how the IRS examines a "dealer" one of the most important issues appears to be the taxpayer’s volume, frequency and consistency of real estate sales. Said differently, if you have a history of selling a lot of properties and do not have other business activities then this may weigh in favor of you being a dealer.

But just because the IRS may consider you a dealer with respect to a property or certain properties, it may not make you a dealer on all of you properties. It may be advantageous to have certain flips grouped in one taxable entity (for example an LLC possibly taxed as an S Corp) and have "buy and holds" in a separate entity.

You should really discuss the situation with your CPA so that you have a tax plan that is consistent with what you are trying to accomplish.

I would agree that in most situations an LLC makes the most sense (from a legal standpoint). However, there are still may tax consequences that need to be examined.

The three main US tax issues that foreign investors need to be aware of are: (1) income tax; (2) estate tax; and (3) gift tax. Some of these issues are rather straightforward, but depending on your tax situation there may be entity structures that you can implement that will make the investments more effective and tax efficient.

Many foreign investors will find themselves being assessed tax at the same rates as US individuals. These rates begin at 10% and go up to the highest rate of 39.6%. Rental real estate will often generate depreciation expense and other direct expenses, so most investors will only pay rates at the lowest level of 10% (if they pay tax at all). The US tax code also has a very favorable long-term capital gains rate of 15% (subject to certain income) that may apply upon the sale or disposition of the property.

In addition to federal taxes, investors will also have state taxes to consider. The US has of course 50 states, but only 43 have a state income tax. But some states impose a transfer tax and other assessments that can complicate the situation. Navigating state tax law and filing the applicable tax returns is certainly not easy.

@AdaPia D'Errico

Unfortunately, I won't be able to make it.  I may be attending a couple other crowdfunding events this fall.  I would have enjoyed meeting him, but maybe next time.  In the meantime, feel free to let me know if you have any questions.

@Jay Hinrichs

Memphis has had a good run, but I still see people buying there and Nashville.  Seems like more are buying in Ohio though.

Looks like a good opportunity for newbies to learn a bit about real estate crowdfunding.

I have been working for awhile on tax issues in the real estate crowdfunding arena, so I know there are a lot of issues for investors to understand.  This should be a good chance for folks to get some quality information.

I have a lot of clients who are re-allocating their real estate portfolios to Tennessee, Ohio and Georgia.  I guess time will tell if this is a smart move.

Make sure that you understand the tax issues up front.  Take a look at another post here that discusses some of the issues.

http://www.biggerpockets.com/forums/51/topics/108001-legal-advice-needed-on-how-foreigner-can-avoid-paying-30-witholding-tax?page=1#p950160

You are correct that as a general rule you are subject to a 30% withholding based on gross rents.  But you can avoid this treatment.  First, a little background...

Nonresident aliens are taxed based on the source of their income and whether or not their income is effectively connected with a US trade or business. A nonresident alien’s income that is subject to US income tax must be divided into two categories:

• 1.Income that is effectively connected with a trade or business in the US, and
• 2.Income that is not effectively connected with a trade or business in the US.

The difference between these two categories is that effectively connected income, after allowable deductions, is taxed at graduated rates. These are the same rates that apply to U.S. citizens and residents. Income that is not effectively connected is taxed at a flat 30% (or lower treaty) rate and does not allow any deduction for expenses. Rental real estate is defined as income that is not effectively connected income and, therefore, would be subject to the 30% withholding.

However, if you have rental real estate you can elect to have it treated as a US trade or business for tax purposes. If you make this choice, you can claim deductions attributable to the real property income and only your net income from real property is taxed. The choice applies to all income from real property located in the United States and held for the production of income and to all income from any interest in such property. If you make this election, you must attach a statement to your tax return.

Each foreign investor situation is different.  Make sure that you engage a qualified CPA who understands the tax issues you are facing.