| The 1st step in doing any real estate investments is to | | | | value of real estate. The taxes are not always |
| start a business. There are different types of business | | | | reassessed depending on the market cycle and it is |
| entities: sole proprietorship, Limited Liability Company | | | | your responsibility to dispute them. In state of Maryland |
| (LLC), Series LLC (only in certain states), Limited | | | | it is allowed to dispute personal property taxes within |
| Liability Partnership (LLP), LLLP, S-Corp, C-Corp. Series | | | | 60 days off settlement date or file before the end of |
| LLC can be set up in following states: Delaware, Iowa, | | | | the year for the next year hearing. Even though taxes |
| Oklahome, Tennesee, Utah, Wisconsin. | | | | are a deduction against income, they are not a tax |
| Each of them has its advantages and disadvantages. | | | | credit, and the more you can minimize your expenses |
| The only true flow through taxation entity and the | | | | the more profit you will end up with. In order to |
| most beneficial in terms of holding real estate is Limited | | | | successfully dispute your tax bill you would need to |
| Liability Company. Limited Liability Company allows you | | | | show the comparables and recent sales prices of real |
| to pay for business related expenses with pre-tax | | | | estate in your area. You will also need to compare the |
| dollars. It is very important to understand that when | | | | real estate that was recently sold to your property in |
| you get paid and receive your paycheck, your taxes | | | | terms of structure, number of bedrooms, bathrooms, |
| are already deducted and all your expenses whether | | | | square footage, amenities, etc. |
| they are real estate or business related are deducted | | | | Capital Gains Taxes. This type of tax is imposed only |
| on AFTER-TAX basis. When you have an LLC, you | | | | when you sell the property. The difference between |
| take all business expenses, deduct them, and pay | | | | purchase price and sales price is subject to this tax. |
| income tax on what is left over. LLC does not require | | | | There are exemptions to homeowners who lived in |
| records and minutes of meetings. Filing paperwork is | | | | the property for at least 2 years and the amount of |
| limited to articles of organization that lists LLC | | | | profit. There is a way to defer capital gains taxes by |
| members. Tax Advantages: LLC is a pass through | | | | doing a 1031 Exchange. Make sure that you contact an |
| entity and if it is a single member the entity is | | | | escrow company and do everything within IRS |
| considered disregarded by IRS. A corporation is | | | | guidelines. According to this IRS rule you can sell your |
| subject to double taxation where not only the profits | | | | property, find another property, make an offer within |
| are taxes but also distribution in the form of dividends | | | | 45 days and settle on a new property within 6 month |
| are taxed as well. The other advantage is flexibility in | | | | and defer paying capital gains taxes. According to the |
| terms of LLC ownership transfer. LLC ownership is | | | | IRS tax rules, the property you are buying must be |
| guided by Operating Agreement, which is an internal | | | | "likewise" property, meaning it does not matter if it is |
| document. In order to change ownership all that needs | | | | bigger as long as it is "investment" just like the one you |
| to be done is the Operating Agreement and no filings | | | | just sold. So you can buy a single family house and |
| are required besides updates with IRS for given tax ID | | | | buy an apartment building as long as both were |
| number. LLC is the only entity that is NOT subject to | | | | investment properties. |
| loss limitation! It also has less filings than an S-Corp and | | | | What is essential to know before setting up an LLC? |
| very easy to maintain. If you have multiple properties, | | | | The NAME. Your business should be in the name of |
| have them each in LLC and have one LLC to be your | | | | your LLC. Most companies name LLC by the street |
| holding company that would own all the other LLCs. | | | | address, for example 17 Lexington Ave LLC...I prefer to |
| For tax purposes your main holding LLC will be a sole | | | | name them by the number and street name only |
| member LLC for the other ones and you will need to | | | | without St..Ave..Ct.etc For example 17 Lexington LLC. It |
| file only one tax return. In addition to the tax benefits | | | | is just easier to remember and shorter to write. When |
| LLC also allows you to have a basic level of asset | | | | you get a number of LLCs set up it starts getting |
| protection. If your business owns the assets, they are | | | | confusing which one was St or Street or Ave, and the |
| separated from your personal assets and in case of a | | | | correct spelling of the LLC is essential in absolutely |
| law suit they can not be touched. Please, note that | | | | everything you do. |
| LLC is a BASIC level of asset protection and if the | | | | CHECKING NAME AVAILABILITY. Once you pick the |
| opposing party has a good attorney there are many | | | | name, you need to check the name availability with the |
| ways how your personal assets can become a part | | | | Secretary of State Office. In many states in could be |
| of a law suit. It is called piercing corporate veil. For | | | | done online, and if you go to Secretary of State |
| example, you are required to have a separate bank | | | | Office, they can check it there for you as well. I like to |
| account for an LLC. If your LLC owns your property, | | | | go in person to file all paperwork just because I can |
| then all property relates income and expenses have to | | | | get everything done right there and get all paperwork |
| come out of that particular bank account. If this is not | | | | in my hands the same day. In state of MD it costs |
| done, the LLC status can be disqualified and your | | | | extra for expediated service but it is worth paying |
| personal assets become part of the lawsuit. Your LLC | | | | because you need to get your bank account and |
| must be in good standing with the state and your must | | | | everything else straightened out right away. |
| have adequate information on your article of | | | | ARTICLES OF ORGANIZATION. Articles of |
| organization. The purpose of the business must be | | | | Organization is the name documents that lists |
| clearly stated with no exclusions and you must file | | | | members and managers of the LLC. It does not have |
| amendments when necessary. If you buy real estate, | | | | to be registered with the state, at least in MD and NY. |
| you should say that you buy, hold, rent or lease | | | | REGISTERED AGENT OR RESIDENT AGENT. An |
| residential real estate; if you sell, you must state that | | | | LLC requires a resident agent to serve on behalf of |
| you buy for the purpose of resale for profit, etc. In | | | | the LLC. It can be a business entity or individual that |
| some states it is necessary to publish LLC in a local | | | | resides in the state where LLC was formed. For |
| newspaper, and it can get very expensive; in other | | | | example, if you live in state of New York, you can list |
| states like Maryland you need to pay annual fee, which | | | | your name and address as a registered agent, or hire |
| is currently $300 a year. You need to check on your | | | | a company to represent the LLC. If the LLC is formed |
| state requirements and guidelines and always be in | | | | in another state, it is necessary to have a registered |
| good standing with the state. | | | | agent in that state. |
| Primary Residence. If you have an LLC, you might | | | | LLC organizer. Members of LLC or somebody |
| need an office and conveniently enough it could be in | | | | authorized to register LLC. |
| your personal residence. According to IRS Code 288G, | | | | EXISTENCE of the LLC is perpetual and does not end |
| you are allowed to deduct rent payments for your | | | | with the death of its members. |
| office space in your personal residence. | | | | WHAT MISTAKES TO AVOID WHEN SETTING UP |
| Depreciation. It is the most beneficial deduction in real | | | | LLC: |
| estate! While your real estate is appreciating, you are | | | | 1. Start without a budget. It is necessary to incorporate |
| allowed to depreciate it over the life of the building, | | | | budget for setting up LLC, which includes filing fees, |
| which is 27.5 years and take the deduction against | | | | fees to maintain LLC (in state of Maryland department |
| your income. However, depreciation is allowed only | | | | of assessment and taxation required $300 annual |
| against the building, land can not be depreciated. For | | | | payment just to maintain LLC in good standing), fees |
| example, if you own a house thats worth 100,000, the | | | | that accountant will charge extra at the end of the |
| value of the building might be only $80,000 and the | | | | year to file taxes, some states require LLC to be |
| value of the land is $20,000. Thus, you are allowed to | | | | published and it might be VERY costly (e.g. in New |
| take depreciation expense against the value of the | | | | York it can cost a couple thousand dollars, but |
| building only. | | | | Maryland does not require publishing at all), initial |
| Accelerated Depreciation. You might have heard from | | | | contribution requirement needs to be met, annual fee |
| your accountant that accelerated depreciation is not | | | | to resident agent, separate bank fees might be |
| allowed against real estate, and it is true, but there is a | | | | charged for an business account like checks, monthly |
| way to make improvements deducted in prior years | | | | service fees. |
| and it all depends on how they are classified. For | | | | 2. Neglect to check the name availability. It is absolutely |
| example land improvements such as curbs, sidewalk, | | | | crucial to check the name availability for LLC before |
| and landscaping are depreciated over 15 years; | | | | filing and paying the fee that might be non-refundable! |
| personal property is depreciated over 5 years. Items | | | | Not only that, if you file paperwork, you wil probably |
| that are considered personal property according to | | | | have the same LLC name where the title is |
| IRS code 1.48-1(c) must have one of the following | | | | transferred to the property and it can become a |
| features 1. accessory 2. function 3. movability. Basically | | | | problem. |
| everything that is an accessory, functions or movable | | | | 3. Always hire an attorney. It is not true that only an |
| is real property. If you are doing a rehab and can install | | | | attorney can file paperwork and write up documents. |
| movable walls, you can deduct the cost of | | | | Anybody can be qualified to file on behalf of LLC, and |
| improvements over 5 years. If they are not movable, | | | | in many cases it is unnecessary to pay attorney fees. |
| then you will have to take 5-6 times less deduction for | | | | 4. .Neglect the other paperwork. It needs to be |
| improvements in the next 5 years. Make everything | | | | checked what paperwork is required and needs to be |
| you can either function, be an accessory or make it | | | | filed in each state, and it is YOUR responsibility to |
| movable! One commercial developer built his office | | | | check even if you hire a professional to do it for you. |
| building with light weight movable walls and was able to | | | | 5. Contribute lots of Caputal-might not be a good idea. |
| deduct $80,000 that same year. | | | | Each state has a minimum amount required to be |
| DEALER status. When flipping properties it is important | | | | contributed to the LLC. Only this amount or what you |
| to avoid "DEALER" status. In some case it can be | | | | need is necessary to contribute, because if you need |
| avoided by flipping properties through different entities, | | | | to withdraw funds it becomes distribution of capital |
| in some cases by doing a few transactions, but the | | | | which is a taxable event in the eyes of IRS. |
| easiest "investor friendly" way is to simply state your | | | | 6. SKIP over BUY-SELL agreement. It is necessary to |
| INVESTMENT INTENT. If you state that your | | | | have an exit strategy, especially when LLC is a |
| investment intent is buy, hold, lease, and rent properties | | | | partnership because you never know what can go |
| unless forced to sell under certain conditions like need | | | | wrong and it is always better to have everything in |
| for working capital, you can get away with not being | | | | writing. |
| considered a DEALER. | | | | 7. Get tax ID later is not a good idea because it is |
| IRS Red Flags. There are also certain things you | | | | better to get everything right away including a bank |
| should not do that would raise red flags to IRS and | | | | account. Without tax id you cant have a bank account |
| you might get audited. First, do not report too much | | | | and without a separate bank account IRS can |
| rental income loss, there are plenty of expenses you | | | | disregard LLC as a business entity |
| can find to reduce your pre-tax income. Second, do | | | | 8. Just ballpark the income tax. Never estimate what |
| not over complicate your asset protection structure. | | | | your income and expenses are and keep accurate |
| Having too many business entities on top of each | | | | records of everything. If you have a separate LLC |
| other, or having domicile headquarters in Las Vegas, | | | | account for the property, write checks from that |
| NV, tax free state could be a red flag. Reporting | | | | account for all expenses including maintenance, state |
| losses for more than 2 years always raises red flags. | | | | fees, property taxes, management fees, advertising |
| The common sense behind it: "if you do not make | | | | fees, and all other expenses related to that property. |
| money why are you still doing business?". Reporting | | | | 9. USING LLC account for personal benefit is |
| excessive donations, high expenses vs high income | | | | absolutely unacceptable and can be VERY COSTLY. |
| can also cause an audit. | | | | If you ever get in a lawsuit, the other party may |
| Property Taxes. Real Estate Investors are subject to | | | | sephina bank statements. If LLC account was not |
| a number of taxes including property taxes. Assessed | | | | used solely for the purposes as stated in operating |
| value and market value of the property always have | | | | agreement and contain unrelated expenses, the status |
| a gap. In 2007 assessed value was normally lower | | | | of the LLC can be disregarded and you can become |
| and in 2010 it is 99% of the time higher than market | | | | personally liable for the law suit. |