All Forum Posts by: Tom Makinen

In some states, you sign a waiver regarding asbestos.  Is it okay to require a tenant to sign that?  I remember there are waivers like military bases, airport, etc

BTW, if cash is not a concern and you currently don't have a retirement plan, a solo 401K would be super helpful in my example above.  You might be capped out personally at 18K, but I believe corporation can give you up to 50K or something.  You might be cash strapped, but crap you just took 50K off the taxable total off your corporations taxable income, which in turn takes it away from your 40% tax bracket.  You can also take 18K off your own personal income.  

You can actually expense a lot of things as a legitimate business (which you will have) and there are other ways to get money out.  But I no longer work in this field so I don't want to say too much.  Please keep records and documentation for everything. 

I never got in personal accounting until I realize I was paying more for my personal taxes than the corporation I worked for.  

• You push money into the S corp as a contribution, on C corp it can be called capital contribution/paid in capital.  Do not directly buy from your bank account, push the money to the corp first before you buy.
• S Corp doesn't pay taxes on distribution, you will pay it as ordinary income on your 1040.  
• You need to pay yourself a salary, subject to self employment taxes (15%+)
• You might be eligible for 20% off the income on S corp, but check with a CPA as it comes with many restrictions such as the type of income and your household income
• C corp will have the same wage requirement (15.3%), but technically some parts flow to you and some parts stay with parent.  
• Profit will be taxed at 21% at the corporation level, you then get hit with 20% as qualified dividends at your income level
• You are flipping houses, this is ordinary income.  Don't worry about dealer or no dealer status since this won't effect your other houses.  Unless you plan to keep it, it doesn't make any difference.  I posted another tax sample on another post about the difference between the two.  

Just for fun, here is a rough chart on how C corp/S corp can change.  This is why you ask lawyers and attorney a specific tax question, they always say it depends as there are so many variables

I still do not know how you can split your profit with your partner without some sort of LLC or partnership agreement. If you take title on that house, you will pay taxes on it. If she takes title, she will pay taxes on it when it sells.

You might want to speak to a title expert on title insurance and qcd, I think it voids title insurance.  

Your parents don't have to be in a LLC (unless they want to stay anonymous), but they should form a LLC 50/50 with the in laws. It makes tracking numbers and taxes a lot easier. The LLC will file its own return, it will then send a K1 to both you and your inlaws to split the numbers 50/50.

@Alvin Uy  Something doesn't make sense to me.  If she is financing this deal, chances are that the lender will have the 1st lien.  How are you going to move that title to you?  Secondly, how are you going to split the money and profit cleanly when you are not on the title.  You won't even be able to get the proper tax numbers in and out when you have no ownership of it.   Even if you get the entire title to yourself somehow, you have to pay taxes on the entire gain and then split the gain with her 50/50 when that is calculated pre tax?  

Those questions aside.  It sounds like you have a lot of personal assets.  Imagine you get on the title for this flip, someone dies on the job.  If the judgement exceeds your umbrella, they will start selling your assets until you get to a point where you can satisfy the entire judgement.  I don't mean to be doom and gloom, but you do live in California where there are a lot of lawyers and a lot of equity money for them to take.  Holding a high risk item under your personal name along with your other asset is too risky for me, I am not going to risk half a million in assets to try to make 50-100K.  Oh yeah, don't mix that with your day job.  

@Eamonn McElroy  Most of them I have seen and dealt with have enough expenses to draw their profit to nearly zero.  Double taxation is also not as big of an issue as some people make it out to be.  Dividends from their corporations are at LT capital gains anyway.  The recent tax changes made sure corporation gets preferred treatment over individual filers.  

If you are buying and selling within the same calendar year, I am not sure how else you are going to avoid this being anything other than ordinary income.  It will be subject to your tax bracket, 10% in CA taxes and possibly self employment tax.  If you are lucky, you can avoid the SE tax if you call this short term capital gains.

The dealer status is by property, so it doesn't sink your other holdings.  You just won't get 1031 exchange on it if you are labeled as such for this.  Also since you already capped out, chances are that your SE taxes will be much less.

My next question is with you being such a high asset person, I hope you have a lot of insurance because I see a lot of risk.

Maybe I miss the financing option.  Are you just buying in cash?  How are you dividing up between your partner and you.  Without a K1, you are going to have a lot of fun splitting the numbers up.  

Are you planning to get title insurance?  If so, use a warranty deed.

You can get any LLC pretty easily. In CA, you will get it within 4 days. Still, the LLC is only there for liability protection. It won't give you much tax benefit. I mention a C Corp because you can easily run expenses through it that you might not be able to on Schedule C.

Since your deal is pretty complicated and you are dealing with some big numbers, I recommend you get a good tax planning firms.  Remember CPAs are good at calculating number, it doesn't mean they get you the lowest taxable number.

@Eamonn McElroy  I don't disagree with you if you have a regular business, but managing real estate the c corp will give you more flexibility.  Best of all, Section 1244 is only available to C corp.  Someone in the high tax bracket with a 20K loss would appreciate deducting it in 1 year against ordinary income.

@Cameron Price  You seem to have a tough time understanding cash accounting vs. accrual/tax accounting.  The depreciation recapture is simply took back what you deducted before.  If you didn't have depreciation, you would pay more taxes up front and less money later.

Let's say there is no depreciation recapture or depreciation at all.

Year 1, you paid 25K.  That doesn't trigger any tax implication other than establish your cost basis.  

Year 1-5  You made $8000 a year in rental income.  You are taxed on that $8K on your entire income per year.

Year 5 you sold it at 40K, you will pay capital gains tax on the 15K

Now you have depreciation

Year 1 you paid 25K

Year 1-5  You made $8000 a year in rental income.  Just to make it easy, let's say your depreciation is 1K a year.

Year 1-5  You pay taxes on 7K (remember 8k without depreciation)

Year 5 you sold it at 40K  you will pay capital gains tax on the 15K since your original cost basis was 25K

Year 5  You already subtracted 5K (1x5) in depreciation between year 1-5, you have to add it back in to get back to your cost basis of 25K.  That means you have to pay the 5K in taxes to pay back the government the 5k you took from them in Y1-Y5.   

This is not really political, this is not understanding accounting.....