Posted by firefox on September 02, 2003 at 03:39:56:
Why take all profits out of the business?
A C-Corporation:
Nets passive losses against ordinary income.
Boosts growth and reduces borrowing (15% bracket).
Double tax only matters if you have cash to distribute. The 15% tax bracket in a C Corp is ideal for paying non-deductible expenses like principal or split-dollar life insurance.
Capital Gains - Posted by David
Posted by David on August 26, 2003 at 08:41:10:
To all you investors out there that have delt with capital gains, I need your help. I am new to this investing in real estate and would like to go into it as soon as possible. All the books and seminars in the out there can’t prepare you for the real world in real estate investing. I would say that you have to get your feet wet. However with all there is to take in, it would make a person to feel a little bit reluctant to “jump in” so to speak. I plan to reahab properties for quick resale. That is where capital gains come into play. I am forming an LLC, will that help me? Also I thought that if you took your profits from one house and put it into another, could you avoid getting hit with capital gains. Also, how much should I expect to pay in taxes should I hold about a $10,000 profit? Thanks for your help.
Re: Capital Gains - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on August 26, 2003 at 11:13:35:
David-------------
Don’t worry about capital gains taxes–you won’t have to pay any.
Of course, that is because the profits of quick turnover property are all taxed at your regular ordinary income tax rate. There are no tax breaks for real estate merchandising, which is what you are proposing to do. If you want any tax breaks, you have to do real estate investing–which is holding properties for long periods of time, typically with rental income.
I am not an attorney or a tax lawyer. You might want to consult such a person or persons.
Also, you cannot do 1031 exchanges out of or into quick turn properties. You cannot elect installment treatment of the profit from the sale of a quick turn property. You pay ordinary income rate taxes on the full sales gain in the tax year of the sale, even if you do not receive all the money at the time of the sale.
I doubt if any entity will allow you to reduce your income taxes any more than being a sole propriator. However, perhaps there are some things here with which I am not familiar, as I don’t use corporations or LLCs.
Good InvestingRon Starr********
Re: Capital Gains - Posted by Peter_MD
Posted by Peter_MD on August 26, 2003 at 09:07:54:
David:
Today … not tomorrow, give a few CPAs a call in your area and set up appointments. You will be surprised but most can offer evening hours since the tax deadlines have mostly passed.
You should get the first consultation for free and they should be ready, willing, and able to provide you with concrete answers to the questions you posted.
Look at it this way, you’re going to need a real estate attorney and a CPA anyway … it’s just a matter of time. So, why not do it now when you have questions and they have answers (and the time to spend with you to discuss your concerns in detail).
Another suggestion. Go to the very next real estate club meeting in your area and look around for a CPA that is present … or ask others for a referral. The word of mouth referral (particularly in our practice) gives us a warm friendly non-adversarial introduction to people who really thrist for information and are appreciative of the time we spend with them explaining the complicated tax laws. BTW, several new laws have taken place (one in particular dealing with your subject of Capital Gains) just took effect in the new tax laws. Get someone to explain how it affects you and your business.
Lastly, you’ll never know it all on any subject. So, as Rich Dad professes, hire someone who knows the laws and how they work in your favor. It will be money well spent. Our astute clients always present a multitude of questions to us on various topics dealing with accounting and taxes. If we don’t have that particular answer at the tip of our fingers (or tounge) we get back to them with the answers. Some answers they don’t particularily like, but … we don’t make the tax laws, we just ensure they are enforced properly.
… and none of my rehabs ever had me working on any of the roofs, wiring or plumbing ;-D=
Good luck to you … in all that you do …
Re: Capital Gains - Posted by firefox
Posted by firefox on August 26, 2003 at 18:32:33:
>I doubt if any entity will allow you to reduce your income taxes any more than being a sole proprietor.
The real savings IMO is in self-employment taxes. You only have to pay self-employment tax on your salary. Profits are free of self-employment tax. Since the original poster is doing quick-turn deals, self-employment tax is a big deal. If all you do is rentals, you never pay SE tax so corporations don’t offer as much. There are some additional benefits (medical reimbursement plans, for example) that you can’t have as a sole proprietor that one should factor into the equation. Significant income tax savings can be had, if you don’t need every dollar earned to sustain your lifestyle, by having a C corporation and dividing income between yourself and the corporation. The savings in income and self-employment taxes can be thousands of dollars annually.
Asset protection? - Posted by randyOH
Posted by randyOH on August 26, 2003 at 12:33:56:
Ron,
You say you do not use entities in your business. I would be interested in your thinking on asset protection.
I do not use entities either, but I have been giving it some thought. I question whether you really get much protection from lawsuits by using entities. And I just dread the additional paperwork and other complications.
I would like to hear your thoughts.
Thanks in advance,
Randy
Re: Capital Gains - Posted by kgreen
Posted by kgreen on August 26, 2003 at 11:23:40:
Ron,
From your comment above “I don’t use corporations or LLC’s” can I assume that you do all your tranactional business as a sole propriator? I know this is how We run our appraisal businesas and it does simplify taxes.
Savings is only temporary, right? - Posted by randyOH
Posted by randyOH on August 26, 2003 at 19:33:06:
I am sure you are aware of this, but we should probably mention that the tax savings from retaining profits in a C corp are temporary. You will eventually be taxed on these profits when they are withdrawn from the corp. Of course, if you keep the profits in the corp until you die, your survivors will probably get a stepped up basis in the corp stock. However, after 2009, this basis step-up will be limited to $1.3 mil for property passing to your children.
Re: Asset protection? - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on August 26, 2003 at 13:30:03:
Randy–(OH)-------------
I do worry sometimes about problems with lawsuits. Before I became a real estate investor I had been in only one, a divorce. Since I became a tax sale investor I have been in three. All three were resolved in such a way as to satisfy me–profits on the three properties involved.
Maybe because of the lack of lawsuits, I am too lax. I’m not sure.
I have talked with John Beck, an attorney who has masters degrees in taxation and business administration. He has extensively studied asset protection for law clients of his. He even went to the Cook Islands and talked to the people there that administer the Cook Island Trusts. His conclusion, if I understood him correctly, is that asset protection is extremely expensive when done by attorneys. Thus, it is useful almost exclusively for those with extreme wealth. It would seem that somebody could offer a lower-cost version of what the big law firms use, but I don’t think that is so.
I worry, but I don’t use entities. Here in CA, one has to mail off $800 a year to the secretary of state for each entity: LLC, Corporation, limited partnership. A high price to pay. A disincentive to have entities.
Besides the extra paperwork you mention.
The best idea I have heard for asset protection is to have huge loans secured against the properties that you own in the county records. Then have a signed release or reconveyance of the security instrument in your safe deposit box. Attorneys investigating your assets whould conclude that you do not have much in the way of assets above the loans. So they may not sue you. No guarantee. But it seems simple and cheap. I have not done this either. Perhaps I should.
Good Investing**************Ron Starr*************
Re: Savings is only temporary, right? - Posted by Jim (NY)
Posted by Jim (NY) on August 27, 2003 at 09:06:04:
This is why I don’t see all of the hype revolving around C Corps. Unless you can reduce your profit to zero, you’ll eventually have to pay the tax when you take your profits in the form of a dividend. Now, you’ve still payed double tax on your money. You can take the money out in the form of salary and bonus, but you’ll end up paying FICA tax on your end plus on the corporate end. Now, if you can reduce the corp. income to zero, you’ll avoid the double tax issue. With S corps, you can’t deduct med benefits (which may be a big deal to some - they’re quite expensive if you’ve got to pay them yourself), but that’s the only advantage that I see to having a C corp.
Re: Asset protection? - Posted by Jim (NY)
Posted by Jim (NY) on August 27, 2003 at 09:17:27:
Ron, what are the fees for S Corps in your area? That might afford you a little extra protection, but in my experience it won’t afford you much. I haven’t been privey to any lawsuits myself, however, a close friend of mine who owns a business thru a Corp has gotten sued PERSONALLY for activities of the business before. While it never went to trial, they made it very difficult for him (tied up his personal funds) until the case was settled. He settled just to have his PERSONAL funds released. His attorney, while not giving a good explaination, said that this could be done.
The only other route would be to own the property in a Land Trust, with the Corp. as the beneficiary. In this case, your name shouldn’t show up on any of the docs. Land Trusts, from what I understand, are relatively cheap to form… It may seem like a hassle to fill out all of the paperwork, but it won’t seem so bad in the event that you get sued…