Posted: 7/1/2010 6:53:47 PM EDT
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I plan on meeting with my tax accountant later this month to review things, but I'd really like to smooth some things out before I bring silly questions/ideas to him at a hefty hourly cost.
I'm 27, engaged, no kids, no prior marriages. I own a property in full (nothing special, around 40 acres, no buildings) with my brother and father, and have a moderate mortgage on the home I currently live in (what's left of the mortgage is roughly 36% of the market value). Truck and Jeep are cash, only other obligations are some student loans at 2.5% and the normal monthly bills. I also do contract work, on what are generally long term contracts. The money is good, but there are no benefits, so everything is taxed. This may change in a year or two, but for now, that is my situation. I'm looking to buy a rental property this fall. My concerns are not with the pitfalls of being a landlord, as I feel well prepared for that, but rather with how I structure the venture. My thoughts are to create an LLC to distance my personal holdings from any liability. I'd also like the LLC to take ownership of my truck so that I can deduct all business related expenses, depreciation, etc. I would also like to transfer some of my normal household bills (phone, internet, and professional development) to the LLC as they would be used largely for the LLC. These all seem reasonable to my limited knowledge of tax law, but I'd also like to form the LLC and begin using the deductions ASAP, despite the fact that I likely would not be purchasing a property until about 6 months from now. Does this seem reasonable? I'd like to take full advantage of any/all tax breaks, but I also don't want to be shoving a ball gag in my mouth and bending over a barrel just waiting for the tax man to show up and audit me. |
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the llc is the way to go based on all of my research.
you must remember, you are requried to hold yearly meetings, even if it is with me myself and I. And record these meeting occured. Apparently there are some places that will file these for you for a fee. Your tax man should be able to answer if you cna start deductions prior to purchasing property. I believe you should as long as you are using it in search of property. That is your truck can't be a to and from your work truck, rather to view other properties potentially for buying. But I am not sure on that. I do know that corprate vehical laws did change a while back, so "fleet" vehicals have some catchs for use and size now. Again something to ask your tax guy. |
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Also, talk to your tax advisor about an S-Corporation.
This lets you receive some of the money you make as a salary (subject to 15.3% self FICA tax), plus federal taxes. The rest of the money you pay yourself as dividedneds. Any money you receive as dividends is exempt from FICA tax, so it can be up to a 15.3% savings. (Amounts above 102,600 are taxed at 2.9%, so the savings are less) This makes sense (at least to me). If you were to pay somebody to do your job, you might pay him 60 grand, and his salary would be subject to FICA taxes. Any extra money you make, you would claim as a dividend to yourself, and you would not pay FICA taxes on that. Basically by forming an S-corp, you can pay yourself that salary, then claim the dividend for a portion that you are making as a return on your investment. An LLC can be setup as a S-corp for tax reasons, so don't think you have to chose between one or the other. Our buddies in Congress are trying to close this 'loophole'. It has passed the house, but not the senate (yet). Its HR 4213, "American Jobs and Closing Tax Loopholes Act of 2010." How can anybody vote against a bill with a name like that? I'm sure your tax accountant will know all about that, but until it is passed, who knows what will be in the final bill. |
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Quoted:
Also, talk to your tax advisor about an S-Corporation. This a horrible idea. Rental property belongs in an LLC. If you have the time and money, each rental property should go into a separate LLC. This segregates and limits your liability should something happen with those rental properties. Whether nor not you can write off your truck expenses isn't dependent on who owns it (you or the LLC), but on how it's used. If you drive the truck for personal use 99% of the time but it's owned by the LLC, you still won't get any tax benefit out of it (but could write off the 1% of business use) |
| To clarify, I have no illusions of gaining any meaningful income from this at all for quite a while. I'd mainly like to build equity and have the opportunity to lessen my tax burden. Any income generated would likely go towards paying off the mortgage unless I lost my job, savings were drained, etc. |
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The way I would do it is the following. Yes,you need to form an LLC. In fact you need two of them. One acts as a holding company and holds titile to the properties. The other acts as a mgmt. company and pays the bills for the upkeep etc.
The bulk of the money is "flowed up" to the holding company so that in the event of a judgement of some kind against the one LLC, it's very hard to get to the other, which is in fact where the real assets are. Talk to a good lawyer about setting it up this way. There is a great type of LLC that fits very well into investing in real estate...it's called a series LLC. It makes setting up a new company easier and more cost effective. It is at the moment only available in a few states but more will be allowing it in the future. Best of luck in your venture. |