All Forum Posts by: Ebere Okoye

UBIT (Unrelated Business Taxable Income) applies even in a ROTH IRA. The governing factor is that the IRA is now engaged in a business that does not fit with its tax exempt purpose. A 35% rate so this needs to be planned carefully

Here are my two cents. I usually advice my clients to form entities based on three factors - legal protection, tax reduction, compliance. For you, it's mainly the asset protection part of it you need to worry about especially if you have equity in these properties. Right now, the best one I see out there to use is the MULTI-member LLC with a GOOD COMPREHENSIVE OPERATING AGREEMENT/UMBRELLA POLICY. While I cannot exhaust this conversation on this forum, I will highlight the main advantages.

1. LLC's have the least compliance requirements. no minutes, BOD meetings, even no formal agreement but I strongly suggest using a comprehensive operating agreement. I currently use a 121 page one for my clients.

2. Multi-member LLC's can help in asset protection by dealing with bottom up creditors (has a claim and/or gets a judgment against the LLC arising from the acts or omissions of the company rather than from the acts or omissions of a member, manager or employee)
as well as top down creditors (gets a judgment against the member because of the member's acts or omissions, rather than the acts or omissions of the LLC, its managers or employees). With a good operating agreement and an umbrella policy, you can minimize(NOT MITIGATE) your exposure.

3. Multi-member LLC's tend to be audited a lot less that a single member LLC and because you have rental real estate, you will be filing a schedule 8825 rather than a schedule E.

So while you may not have all the asset protection you want, A good multi-member LLC with a carefully drafted operating agreement and an umbrella policy, taxed as an S corp is the best shot out there for a rehabber/flipper.

Your Entity structure should always start with your real estate strategy in mind and then drill down to the best structure that will solve all three issues (compliance, asset protection, tax reduction).

I hope this helps

I actually have a webinar coming up in two weeks to discuss why some people may have toxic llc's

[AD LINK REMOVED]

Truly inspiring. Keep it up. We on;y learn real estate by doing it

Ok, you get the advantage of hearing from a CPA to Real Estate Investors on this forum. Here are my two cents. I usually advice my clients to form entities based on three factors - legal protection, tax reduction, compliance. You have already noted the difficulty of finding one that meets all three criteria. Right now, the best one I see out there to use is the MULTI-member LLC with a GOOD COMPREHENSIVE OPERATING AGREEMENT/UMBRELLA POLICY. While I cannot exhaust this conversation on this forum, I will highlight the main advantages.

1. LLC's have the least compliance requirements. no minutes, BOD meetings, even no formal agreement but I strongly suggest using a comprehensive operating agreement. I currently use a 121 page one for my clients.

2. Multi-member LLC's can help in asset protection by dealing with bottom up creditors (has a claim and/or gets a judgment against the LLC arising from the acts or omissions of the company rather than from the acts or omissions of a member, manager or employee)
as well as top down creditors (gets a judgment against the member because of the member's acts or omissions, rather than the acts or omissions of the LLC, its managers or employees). With a good operating agreement and an umbrella insurance policy, you can minimize(NOT MITIGATE) your exposure.

3. Multi-member LLC's can help with the reduction of IRS audit exposure since 8825(rental property form for a partnership) is audited a lot less than a schedule e(rental property form for an individual/sole propriertorship)

So while you may not have all the asset protection you want, A good multi-member LLC with a carefully drafted operating agreement and an umbrella insurance policy, is the best shot out there for a Landlord

The IRS recently released a report indicating their intent to perform more examinations of individual tax returns that report losses from rental real estate activity. The increased scrutiny was triggered by a 2008 report that found at least 53% of individual taxpayers with rental real estate activity for tax year 2001 misreported their rental real estate activity. The report appears to direct the IRS focus on those taxpayers claiming real estate professional status

Thus, similar to documenting expenses, documenting your time devoted to real estate related activities is extremely important given the IRS's intent to look more closely at real estate activities.

To read the full Treasury Inspector's Audit Report http://www.treasury.gov/tigta/auditreports/2011reports/201130005fr.pdf

I usually provide my clients with a real estate activity log that can help you in documenting your hours. It contains basically all he activity that you could possibly engage in for rental real estate.

In addition, you should also take the time to analyze your time at work. Working full time does not necessarily mean 2080 hours. Because if we are honest, we do not always clock in 8 hours. It's sometimes hours or sometimes 7 so the base hours for your regular job could be much lower than 2080 and with adding on more activity to the rental real estate log, you could exceed the regular work hours.

This is a coming avalanche so everyone needs to prepare for this

There are two different issues here. 1) Converting Equity to debt is not a taxable transaction for the first LLC. 2) Taking a distribution out of an LLC to contribute into another LLC is not a taxable transaction.

There are 2 ways to take money out of an LLC - as a distribution or as guaranteed payments. Unless you all agree that the debt created will be used to pay you a guaranteed payment, the money taken out is considered a distribution and therefore not taxable.

I hope this helps.

Registering the business online or through an attorney is not as important a question as whether or not whoever you use takes into accounts the three factors in choosing an entity and also at a fair price. I cannot tell you the amounts of money that people have to pay just to get an entity structure but at the end of the day, there really is not protection or tax benefit so be careful

Ok, you get the advantage of hearing from a CPA to Real Estate Investors on this forum. Here are my two cents. I usually advice my clients to form entities based on three factors - legal protection, tax reduction, compliance. You have already noted the difficulty of finding one that meets all three criteria. Right now, the best one I see out there to use is the MULTI-member LLC with a GOOD COMPREHENSIVE OPERATING AGREEMENT/UMBRELLA POLICY. While I cannot exhaust this conversation on this forum, I will highlight the main advantages.

1. LLC's have the least compliance requirements. no minutes, BOD meetings, even no formal agreement but I strongly suggest using a comprehensive operating agreement. I currently use a 121 page one for my clients.

2. Multi-member LLC's can help in asset protection by dealing with bottom up creditors (has a claim and/or gets a judgment against the LLC arising from the acts or omissions of the company rather than from the acts or omissions of a member, manager or employee)
as well as top down creditors (gets a judgment against the member because of the member's acts or omissions, rather than the acts or omissions of the LLC, its managers or employees). With a good operating agreement and an umbrella policy, you can minimize(NOT MITIGATE) your exposure.

3. Multi-member LLC's electing to be taxed as an S corp can help to reduce our exposure to Self Employment tax since your real estate strategy (Flipping) will generative ACTIVE business income. S.E. tax rates are at 15.3% (13.3% for 2011)

So while you may not have all the asset protection you want, A good multi-member LLC with a carefully drafted operating agreement and an umbrella policy, taxed as an S corp is the best shot out there for a rehabber/flipper.

Your Entity structure should always start with your real estate strategy in mind and then drill down to the best structure that will solve all three issues (compliance, asset protection, tax reduction).

I agree with Chris and Nate. Definitely need a Parent LLC and that LLC can now own the other 3 LLC's (rehab llc, rental LLC, management LLC). The Rehab LLC will be taxed as an S corp to mitigate the taxes on that. Depending on if the investors have an equity or debt position, they can be the limited partners of the Parent LLC. If they are equity partners, I definitely suggest having the Parent LLC do a loan package for the Rental LLC so that the property is fully liened. I definitely agree with having an umbrella LLC and a strong and Comprehensive operating agreement. For my clients where we have developed this kind of structure, we use a 121 page operating agreement.

I hope this helps.

Hi Nathan,

Yes, you can only claim expenses to the extent of your rental income and you will not be able to carry any expenses over except those expenses which are considered improvements that need to be depreciated. Expenses such as mortgage interest, taxes, insurance, repairs, licenses, security. Basically, any expense that is ordinary and necessary in running the rental. Yes, you would file a 1065, get a k1 and then report this on schedule E2 of your tax return. If you redo the return and realize that it is not much of a big difference from what was originally done, you can wait and use form 8082 to true-up a partnership income or loss in the following year. That way, you do not ending amending a lot and triggering an audit.