Personal Holding Company? - Posted by Reif

Posted by JHyre in Ohio on March 29, 1999 at 05:54:49:

Lots of looking and knowing it when you see it. Word of mouth is the best reference. Stongly recommend John T. Reed’s Aggressive Tax Avoidance book. His other well-documented vices aside, the section on tax advisors is very good.

John Hyre

Personal Holding Company? - Posted by Reif

Posted by Reif on March 27, 1999 at 10:43:33:

I just got my taxes done with an accountant who is good for me considering my J.O.B.

I told him about going investing in real estate and incorporating, etc. and he said that if one incorporates for the purpose of investing in real estate, specifically rental real estate (passive income), the IRS will consider that a ‘personal holding company’ and tax the income at the highest rate (39%).

I didn’t really have an argument to this, but from our brief conversation I know he is not a real estate maven. His main investment vehicle, from what I could gather, is something called VUL (variable universal life insurance, I think) where you invest essentially tax free in mutual funds in a life insurance policy.

Anyone have any thoughts on the liability of a ‘personal holding company’ and how do other vehicles (flips, buying and holding notes) fall under that provision?

Thanks,

Reif

Probably not an Issue - Posted by JHyre in Ohio

Posted by JHyre in Ohio on March 27, 1999 at 15:54:43:

Reif,

The following is a general commentary on PHC rules. Because those rules (like much else in Internal Revenue Code) are complicated and poorly written ,this primer may or may not apply to your indiviudal circumstances. So you still need to check with a tax advisor, preferably one with a clue. With that said:

To be a PHC and subject to “forced distribution” of dividends at max rate, corp must meet two tests:

  1. 60% of the income must be passive (rents, interest, dividends, etc.). The last sentence is a GROSS simplification, but is essentially correct.

  2. The stock must be 50% held by or for 5 or fewer individuals.

BOTH tests must be met for PHC status to exist. The first (passive income) test is almost certainly not met. That is, you probably plan to use an LLC/S-corp for passive investments and a C-corp for active flips, so no PHC problem (subject to ALL your facts & circumstances!). If you were going to put lots & lots of passive things in a C-Corp, go stand in the corner for an hour and then write “I will not stack C-corps with passive investments” 1,000 times.

VUL’s are useful for high-bracket people (taxwise, that is). The commissions are WAY high, so they are less beneficial for most of us low to medium income mortals.

John Hyre

Re: Probably not an Issue - Posted by Reif

Posted by Reif on March 28, 1999 at 07:43:58:

I know you’re not volunteering to be my tax guy :slight_smile:

But - one other thing . . .

Buying and holding notes then would be passive income as well?

Just trying to organize myself.

Thanks,

Reif

Re: Probably not an Issue - Posted by Reif

Posted by Reif on March 27, 1999 at 23:43:13:

Appreciate the help, John.

So, how does one go about finding a good tax guy for RE investors?

Reif

Re: Probably not an Issue - Posted by JHyre in Ohio

Posted by JHyre in Ohio on March 29, 1999 at 05:51:24:

Reif,

Holding notes is a passive activity. One of the few good tax reasons to use an out-of-state company involves holding passive paper assets (NV, maybe DE) because certian states do not tax the income on intangibles (or at all).

John Hyre