Setting up a real estate business... need advise.

[brchiz]

Hello,

I have been investing in residential rental properties for the last five years and have always done my own taxes and management of the business. The properties are all in my wife and I's names with the exception of the most recent purchase, an 8-unit complex, that I put under our newly formed LLC.

I have never used a CPA and prefer to take care of everything myself, however, I would like some advice on our current structure and possible changes that we should make.

Here is what we currently have setup:

We have a registered business name and business licence setup for our own property management company. My wife and I are sole proprietors and the only employees. All tenants make payments to and all bills are paid from our property management checking account. To this date we have not taken any money from that account for personal use, nor have we taken a salary from the business.

The below are titled in my wife and I's names and managed by our own property management company:
1 - Single Family Rental
2 - Duplexes
1 - 4-Plex
1 - Townhome (used as a vacation rental part time and a personal vacation home part time, however, it is always available for rental)

We recently setup an LLC and purchased the following property under the LLC by obtaining a loan using the LLC (personally guaranteed by my wife and I):
1 - 8-Unit complex

This new purchase is the only property not currently being managed by our own management company (we retained the existing manager for now at 6%).

I also plan to build an online vacation rental portal business for advertising other people's vacation rentals.

My overall question is about structuring this business using the existing LLC and management company. We want to be able to take advantages of the tax write-offs on our personal taxes by filing the business with our personal taxes.

I want to make sure we are doing everything to our best advantage, limited liability and legal.

Any advice would be greatly appreciated!

[Nazreen]

First of all, let me welcome you to the Business Advice Forum brchiz.

I'm not that good with taxes especially with regards to real estate. I also think that tax laws would be different from country to country. If you're from the US, you can check out IRS website (http://www.irs.gov/) for more details on your taxes.

[pendelton]

Hello brchiz, welcome to BAF.

And what an entry too!!!

All your main properties are your liabilities, 100% yours. Get them transfered to the LLC ASAP. If a railing fails and someone breaks a leg you are the one they can, and will, go after, unless you get them transfered to the LLC.

How is your LLC set up, as a corporation or as a partnership? This will tell you how much, if anything, you can take off on your personal taxes. LLC's formed as corporations give you nothing personally, since they are a taxed entity all on their own.
If it is set up as a partnership all profits and losses are transfered to you and your wife.

As for the taxes on your sole proprietorship and any money not spent it does not matter, since a sole proprietorship and you are the same thing. You'll be fully taxed on it as income, this includes all 12.4% for Social Security and 2.9% Medicare up to the maximums. I think Medicare tax, and it's matching, have no maximum, but I do not remember right off the top of my head.
For this part the government does not care if you did or did not use any of the money, you are still taxed as a self employed person, or persons.

Check with the IRS and, if applicable, your state revenue service to look at the tax laws for both types of businesses.

[Fergal]

Welcome to Business Advice Forum, Brchiz.

Have you got an accountant for your business? If not, it sounds to me as if your business is large enough to require the services of a local accountancy practice.

[pendelton]

I have never used a CPA and prefer to take care of everything myself, however, I would like some advice on our current structure and possible changes that we should make.
I'd say no he doesn't Fergal.... ;)

I'd advise at least talking to one and seeing what your options are. You also want to think about your workload when considering this. Will the time saved by using a CPA be worth the expense? Then consider the odd ball loop holes for tax breaks that professionals know, so, will the CPA be cost effective in that manner. Combine the pros and see if it out weighs the main con, the expense.

[Fergal]

A good accountant will often cover their fees by what they can save you in tax. So if you get the right one it may not actually cost your business anything.

[brchiz]

Thanks for the responses. I know that I need to get a CPA... I am just being a control freak! Last year on my taxes, in order to take advantages of the tax write-off from the rentals, I had to claim that my wife or I were real estate professionals. The IRS definition of a Real Estate professional was pretty broad so I figured that since together we have purchased all of our properties, operate our own management company and perform all accounting and operational tasks we could be considered Real Estate professionals. The only reason there would be a question on that is because we both work full time as well.

Also... I was wondering if our Management Company should be owned by our LLC? Right now we have a sole proprietorship for the management company but we do not file business taxes for the management company because it does not have any revenue. We write-off all expenses of the management company through each rental property (supplies, utilities, etc.).

[Fergal]

Sorry, CPA is a US term, I hadn't realised that you were referring to an accountant.


... I was wondering if our Management Company should be owned by our LLC?...

It's difficult to answer that question without knowing your specific circumstances. However, there are a lot of advantages associated with LLC ownership. The limited liability protection will give you a certain amount of security against potential losses in the company or claims against the company.

I'd repeat my earlier advice that you should talk to an accountant. You can still maintain full control of everything. In fact you can get even more in control, because you will be able to make decisions with the benefit of your accountant's advice and expertise. More knowledge = more control.

[pendelton]

I figured it was a terminology difference, thus the wink. :)

That will only work for a maximum of 5 years brchiz, for a business to not generate a profit. After that you can start expecting an audit.

You should run everything through the LLC. Rental properties, from my experience, have higher liabilities than other businesses, and the LLC will protect you from some of them where the sole proprietorship will not.