Custom Asset Protection: Investing in Texas Vs. California

Imagine making an appointment at your family doctor’s office. After driving to the appointment and a brief stint in the waiting room, the doctor calls you back to his office.

Before you can even open your mouth, he informs you that you’re scheduled on surgery for Monday.

You haven’t told him why you’re there. You could have a cold or need a physical for all he knows. But he’s giving you a treatment already—and an expensive, invasive one at that.

Most of  us would be confused and outraged at this bizarre behavior. We would want to know why the doctor was making this decision.

So you ask.

The doctor informs you: “This is the treatment I’m giving all of my patients now, regardless of who they are or what their ailment is. You’ll be fine!”

Would that comfort you at all? Of course not.

You need a treatment customized to your problem and your unique circumstances. One-size-fits-all treatments would hurt more people than they would help.

The same is true in the nuanced, complicated, and personal world of real estate law. So why would we expect a one-size-fits-all approach to work any better for asset protection?

In short, we shouldn’t. Assuming the same tactics will work for everyone is using the same type of thinking as assuming the same medication will cure every illness. Furthermore, a cookie-cutter approach to asset protection is a mistake that can undermine its purpose.

The Importance of a Customized Asset Protection Strategy

Your asset protection plan should be tailored to you, your needs and your goals. That means your lawyer should be using the most suitable tools available. This means he or she must have an intimate understanding of your situation.

Some of the things that can influence which tools are best for you include:

And that’s actually a pretty short list, considering that it is far from exhaustive.

Case Study: A Tale of Two Investors

While it is true that there are best practices in asset protection, creating a plan that will work best for every investor is impossible. Even when two situations look an awful lot alike, one small detail can make the difference between a sound asset protection strategy and an unnecessarily expensive or ineffective one.

Let’s look at two investors who seem similar at first, but who saw very different outcomes with the same plan.

Luke Sloan is a 35-year-old tech sector employee and real estate investor in Austin, TX. Luke has three passive investment properties and plans to acquire a fourth. After attending a seminar with his brother where he learned the dangers of keeping these properties in his own name, Luke read about the Series LLC as an option for limiting his liability and preventing lawsuits.

He consulted with an attorney who was experienced in forming Series LLCs. He checked out his attorney’s website and saw authoritative content on asset protection and a wide range of offerings, and looked into his attorney’s reputation to find it was positive. Luke’s attorney guided him through the process of forming a Series LLC and transferring properties into it using land trusts. Luke’s attorney also educated him on how to use his entity, and how to form additional child series when Luke acquired new properties.

Luke’s brother, Eli, is also a real estate investor. He is a 38-year-old passive investor with a day job in the technology sector in Silicon Valley. They have roughly the same income.

Also like Luke, Eli has three properties and wants to protect them from lawsuits. It occurs to Eli that perhaps he could save some money on legal fees by duplicating his brother’s plan with the cheapest means possible. Surely with so much in common, down to their tax bracket, these two brothers could use the same asset protection strategy, right?

Wrong. Even if Eli got an attorney to create a carbon copy of his brother’s plan, it would leave him with an unpleasant surprise.

Can you guess what it is?

It’s okay if you can't. The difference is subtle.

Although they’re otherwise alike, Luke lives in Texas while Eli lives in California.

The Series LLC is a great entity for investors in most states, but it is not generally the ideal for California investors with multiple properties. If Eli went through with that plan, he would owe $800 in franchise taxes per series to the state of California (so, $2,400). That figure would rise with each newly acquired property.

There is a better solution for Californian investors like Eli: the Delaware Statutory Trust.

Again, it’s okay if you didn’t know that. It’s probably not your job to know it. An experienced asset protection attorney, however, would certainly be aware of this fact.

The really expensive problems begin when investors like Eli attempt DIY asset protection. Even small mistakes like using a cookie cutter entity from an online service can undermine the entire purpose of an asset protection strategy. 

 

A Bad LLC Operating Agreement Can Ruin Your Real Estate Investments

Your operating agreement/operations agreement is one of the first documents your attorney will draft when forming your LLC. Learn more about the common problems in LLC operating agreements and their remedies below.

Common Oversights in LLC Operating Agreements

The vast majority of the time, the problems in operating agreements come down to wording. Language that is vague, irrelevant to your situation, or ambiguous in any way can create real-world problems for your LLC. Here are some common issues, along with examples of phrases to watch out for in your operating agreement.

Decision-Making Powers

LLC members must have a procedure for decision making. When an LLC has multiple members, some decisions may be made by majority. While you can specify unanimous consent under certain circumstances, clearly defining what constitutes a “majority” clarifies your agreement. Decide with your fellow members whether you want to define majority as a percentage of ownership or by number of members.

Another common problematic clause is one which states that any member may do business with the LLC absent any restriction. This can create issues if a member abuses this freedom. To avoid potential problems, specify that any member of the LLC must get majority approval before performing any transaction directly with the LLC.

Managerial Powers

These issues are particularly important for multi-member LLCs. When an LLC is formed, the operating agreement must spell out who the Manager is, how a Manager is selected, and what degree of control they have over the LLC. Unfortunately, clauses that give too much power to a Manager may be abused at the expense of other members or the company. A good document keeps managerial powers in check in the following ways:

Bottom line: any clause that has the potential for abuse of power will catch the attention of a seasoned attorney. Lawyers who do not regularly form LLCs may be aware of the necessary parts of a legally-binding agreement, but are more likely to overlook these nuances. An experienced business attorney or real estate attorney who regularly forms LLCs is your best bet for getting what you want out of your operating agreement.

To learn more, see What Is The Difference Between An Authorized Member And A Manager In An LLC?

 

DIY Asset Protection: 3 Common Mistakes You Can't Afford To Make

Perhaps you’re familiar with the expression “The man who represents himself has a fool for a client.” While this is typically a phrase applied in a criminal law setting, it also holds true for real estate and business law.

This doesn't mean you are incapable of "DIY" asset protection. But it means that all of us have blind spots.

Online services like LegalZoom may make it look easy to DIY your asset protection plan and save a few bucks while you’re at it. However, the money you “save” now could end up costing you far more later if you end up in court.

Asset protection is a topic that many investors become interested in for all of the right reasons: they want to protect their hard-earned assets from lawsuits. Specifically, they don’t want the fruits of their labors to motivate a lawsuit or be seized upon judgment. However, to execute an asset protection plan that will truly defend your assets and stop lawsuits before they even start, you will want to get help from an attorney with experience in asset protection. Let’s look at three of the most common DIY asset protection planning mistakes to illustrate why.

DIY Asset Protection: Man with tool belt

Mistake #1: Using Incorrect Asset Structures

You may do some research and learn that there are some common structures that serve as the foundation of effective asset protection plans. But it’s also easy to overlook some of the factors that help determine which structures are best for you. After all, you don’t know what you don’t know.

Let’s look at an example. Jim is an investor in California who has read about asset protection online. He has four properties in his portfolio that he would like to defend from lawsuits.

Jim is a smart guy who knows the importance of researching the changes he plans to make in his business structure. So he gathers information from multiple sources including BiggerPockets.com and educational articles from law firms like the one you’re reading now.

DIY Asset Protection confused man

Jim is a smart man. Sort of.

Jim quickly learns that LLC structures usually serve as the foundation of most asset protection strategies. He notices that other investors use LLCs for asset protection and feel confident about their decision. He hops online and uses a cheap service to create LLC articles of organization and create a single-member traditional LLC for his real estate holdings.

Seems like a good enough plan, right?

Wrong. In fact, there are three problems with Jim’s approach. First, Jim did not consider (or perhaps did not know) that a traditional LLC is generally not the best approach for Californian investors. LLC laws are defined at the state level, and the best states for LLC formation depend on where you live.

For Jim, the recommended structure would actually be the Delaware Statutory Trust. By establishing an LLC instead, Jim is paying an unnecessary $800 in California franchise tax annually. If he established his LLC in a different state, he may be on the hook for foreign entity registration fees, registered agent fees, and more.

The next problem with Jim’s plan is that he is pooling properties inside of a single traditional LLC. If Jim becomes the subject of a lawsuit because of one of his properties, all of them may be vulnerable to seizure if he loses in court. All the opposing attorney would have to do is prove that the LLC is simply an alter-ego of Jim, an act known as “piercing the corporate veil.” This would be easy for opposing counsel because of Jim’s third mistake: failure to preserve his anonymity. LLCs generally must have their membership recorded with the Secretary of State for the state they are formed in. Since he formed a single-member LLC with no additional structures, Jim’s name is listed on this public record. A competent attorney could make quick work of piercing the corporate veil because of this oversight. Now all of Jim’s properties are vulnerable--not just the one related to the lawsuit--and a judgment against him is easier to secure. If he had used a Delaware Statutory Trust established by an asset protection attorney instead, Jim would have preserved his anonymity, kept his assets separated from each other and him personally, and avoided the $800 state Franchise Tax.

As you can see, there’s a lot to consider when creating your asset protection structures.

Mistake #2: Failing to Use Asset Protection Tools Correctly

Even if you do determine which structure is best for you, you must use it correctly. Let’s imagine you do some research and discover that a Texas series LLC is a great structure for real estate investors. This is true in most states. But you still need to know how to use it appropriately.

Using your entity correctly requires a degree of specialized knowledge. Some of the factors you must consider to effectively use a Texas series LLC include the following:

That is just one example. Trusts are no less complex. You must know which type of trust to use.

Do you know off the top of your head whether you need a revocable or irrevocable land trust? Or which of the many types of trusts are best for asset protection? If not, that’s a sign you will either need to spend hours educating yourself or get help from someone who knows this territory.

Investors can also make errors with drafting their trust documents that legal professionals would not. For instance, you never want to state that a trust is being created for asset protection purposes (more on that below). Similarly, the documents must be written correctly while also applying to your specific situation. This is a task that is almost impossible without a legal background.

 Correctly identifying the parties to the trust is also vital for the trust to do its job.  Finally, you must also know how to file trust documents privately to preserve your anonymity. There’s a lot to know about any of these tools. The above doesn’t even take into account the many more minor errors that could undermine the protections of your trust, nor the role it should play within your asset protection strategy.

If this seems overwhelming, just consider whether it would be the best expense of your time to study all of these items. For most investors, it isn’t. But these details are all things your attorney should be able to advise you on and assist with.

Mistake #3: Stating That Legal Structures Are in Place for Asset Protection Purposes

When creating articles of incorporation for LLCs or setting up trusts, you never want to state that you are doing so for asset protection purposes. Instead, you want to give an acceptable reason such as “real estate investing,” or another business purpose.

Remember: Once you’ve set these terms down in the relevant documents and signed on the dotted line, you’re bound to them.

Should you end up in court, testifying that you created a Trust or LLC for asset protection purposes can also land you in hot water. You must state a legitimate business reason for the creation and use of the structure or it will have no asset protection value. The good news is that this situation is completely avoidable. In fact, all of the above mistakes have the same basic remedy: get help from a qualified attorney instead. Good attorneys will set up your structures ahead of time and advise you on these matters. The best asset protection attorneys will be able to give you the peace of mind of keeping you out of court altogether. Not only will you not have to worry about all of these details, but you also will have someone to turn to if you are ever threatened with a lawsuit who can advise you on what to say--or in this case, what not to say.

A Professional Asset Protection Plan Requires Expertise

There is no good reason to take the risk of creating your own asset protection plan without the help of a qualified asset protection attorney. Even if you’re fairly certain what you need for your asset protection plan, it is still best to get the opinion of a lawyer who is familiar with your specific situation.

The professionals at Royal Legal Solutions have years of combined experience setting up effective asset protection plans for clients all over the United States and Canada. Our attorneys are aware of the state laws that may affect your strategy, and also keep track of changes in the law that could influence how effective your plan would be in the face of a lawsuit threat.

We are also well versed in the best asset protection strategies for a wide variety of situations, as this is the central focus of our practice. As investors ourselves, we are sensitive to your concerns and the value of your time. Using a firm like Royal Legal Solutions allows us to take care of your asset protection strategy while you dedicate your time and effort to finding deals and running your business.

Charitable Gift Options Using a Self-Directed 401(k)

Charitable contributions are a popular strategy among the wealthy for lowering tax payments. But this method isn't exclusively for the Michael Dells and Kim Kardashians of the world. Investors from all income levels, including you, can use it too.

But even savvy investors don't always know that charitable gifts can be made from retirement accounts. So whether you simply want to donate money from your 401(k) to a cause close to your heart, save on your taxes, or both, this article is for you. Read on to learn more about your options for giving charitable gifts with your Self-Directed 401(k).

Why You Should Consider Giving Your Retirement Funds to Charity

The funds in IRAs and 401ks are among the most heavily taxed that the average investor will hold, and redirecting them towards charity can make a meaningful difference. Charitable donations help you save money by reducing your taxable income. This is why many highly wealthy individuals give in large quantities. Sure, many of them are philanthropic at heart, but there is also a distinct tax advantage to donating. The higher your taxable income, the greater your tax responsibilities when Uncle Sam comes around to collect his bills.

Giving to charity also qualifies you to receive a Charitable Gift Tax Credit. Literally anyone can take advantage of this. Generally, the credit is computed by taking the market value of an item or actual amount of cash donated, then subtracting the percentage of your tax bracket.

Strategic donations can lead to thousands returning to your pocket. Of course, there are limits: you cannot donate more than half of your income in a given year. Similarly, for these benefits to apply, you must itemize each donation.

What Options You Have For Giving to Charity

You're likely already familiar with some types of donations. Others are less obvious. Here are some, but not all, of the many methods you can use to your taxable income to a charitable cause:

Which Options Are The Most Beneficial?

While any of these options is certainly beneficial and altruistic to the receiving organization, smart investors may be wondering which will benefit their own bottom lines. You may be surprised to learn that retirement and life insurance donations are among both your strongest and lesser-known gift choices.

Many potential donors do not know much about life insurance or retirement plan asset gifts simply because charities are less likely to request them. Many nonprofit organizations have a need for immediate cash that is simply not addressed with these types of donations. They are nonetheless useful for the charities--and you.

Ways to Give To Charity From Your 401(k)

Below, we'll describe the two simplest options for donating to causes you care about with your 401(k) funds.

Option 1: Donate Directly From the Plan

You can liquidate an asset (or several) held by your plan, then directly donate the funds to the nonprofit group or cause of your choosing.

Option 2: Name a Charity as a Beneficiary of Your Plan

Naming the charity of your choosing as a beneficiary works the same way as designating any other beneficiary. However, this option has the added advantage of allowing plan funds to pass through to the charitable organization completely tax-free. If you have tax-deferred funds, this is actually the smarter expense than passing those same funds on to your heirs.

Your heirs would have to pay the taxes, but the charity does not. Though this may not directly benefit you as much, it is certainly the most efficient use of money that would otherwise be gifted to the U.S. Government. That you can control the funds by selecting any qualifying charity means you have the luxury of supporting a cause you truly believe in.

Section 280A: Home Office Deduction Rules

Many people who have office jobs envy those who can work from home. If you're a small business owner, freelancer, or kick-ass entrepreneur who uses a home office, you probably know that the truth is a little bit more complex. Sure, you can sometimes get away with working in your pajamas, but working from home also takes a lot of discipline and incurs many costs. Fortunately, there is an entire section of the Tax Code that allows for home office deductions that can add up to significant savings. Meet Section 280A, the birthplace of those sweet, sweet write-offs. Read on to learn how to make the most of your Home Office Deductions while staying compliant with the IRS's rules.

Rule #1: You Must Have an Actual Home Office

You can take advantage of the benefits of Section 280A if you have a dedicated office space in your home. Uncle Sam calls this the "regular and exclusive use" requirement. Now, Uncle Sam is reasonable about this. Your entire home does not have to be business-only, but you must have a space in it that is solely for business purposes.
In theory, you could convert your neglected TV room or basement for this, but you have to use it only to manage your business. We have many real estate investor clients who do exactly this and are still acting within the lines of the law. This rule is designed to keep unscrupulous taxpayers from writing off personal expenses as business expense. Of course, we know you wouldn't do that. Just be sure you can prove your case if anyone looks into the use of your home office space.

Rule #2: Your Home Office Must Be Your Business's Base of Operations

The IRS calls this rule the "principle business location" requirement. In plain English, this means your home office must be where the majority of your business is conducted. Let's say you are running a real estate business from a home office. If you are using it for most of your business activities (phone calls, meetings, computer-based work), you can still use another location for other purposes. But only to a point. Having a separate office for meeting high-profile clients or completing shipping duties, for instance, would still qualify you for Home Office Deductions.
One caveat of this rule to understand is that the IRS takes the literal amount of space in your home devoted to business only into consideration. The more physical space in your home that you devote to your business, the better.

Get Professional Help With Your Home Office Deductions

Most people with reasonably stable mental health don't enjoy spending their free time deciphering the tax Code. While this article has explained the basics, these issues are complex. Fortunately, you don't have to slave over the time-consuming process of understanding every detail of Section 280A. That's why the smart move is to get advice from the tax professionals at Royal Legal Solutions. Our tax attorneys already know the Internal Revenue Code inside and out. After all, many of our clients are take-charge entrepreneurs who work from home. In fact, so many of our investors are self-employed individuals that we also offer retirement planning advice for self-employed individuals. Don't torture yourself too much trying to understand the regulations: get professional help today.
 

Solo 401(k) Contribution Deadlines: What The Self-Employed Need To Know

Nobody loves them, but deadlines are nonetheless an important part of "adulting." If you have ever participated in a traditional employer-sponsored 401(k), you likely already know (or have been reminded) that you cannot contribute to these plans beyond the end of the calendar year. What about the solo 401k contribution deadline? Are things different with this type of plan?

Yep. You see, if you don't work for "The Man," the burden is on you to be aware of your contribution deadlines. That's why we have written this little cheat sheet, which will explain your deadlines based on the type of business you own.

Spoiler alert: these deadlines are unlikely to line up neatly with the traditional ones. 

Sole Proprietorship Solo-K Deadlines

Elective Deferrals

If your business is set up as a sole proprietorship, you can make contributions all the way up until your personal tax return is due on April 15th or October 15th. You may choose to make traditional (pre-tax) or Roth (post-tax) contributions to the account. Those interested in making Roth contributions to their Solo-K will want to check to ensure their plan allows for such contributions.
One thing to keep in mind is that regardless of when you make the contributions, you must fill out a form to formally elect the deferrals no later than December 31st, which is generally assumed to be the end of the business year.

Profit-Sharing Contributions

Like elective deferrals, profit-sharing contributions share a deadline with your tax filing: either April 15th or October 15th. Calculating profit-sharing contributions accurately is essential. These contributions are based off of your income, which for these purposes is determined by your net earnings. The IRS has helpfully defined net earnings as your earnings minus half of the self-employment tax deduction as well as the Solo-K contribution deductions. Learn more about how much you can contribute from Uncle Sam's handy memo on Solo-K profit sharing.

S-Corp or C-Corp Solo-K Deadlines

Elective Deferrals

Using an S-Corporation or C-Corporation structure simplifies contributions because they are simply made through payroll. Typically, this means employees elect to defer and their contributions are automated alongside pay.

Profit-Sharing Contributions

Corporations have the luxury of being able to contribute up to 25% of an employee's earnings. These pre-tax contributions are due at the time of business tax filing: either March 15th or September 15th. If the plan allows, employees who wish to may later convert such contributions into Roth contributions.

Royal Legal Solutions Can Help You Understand Your Deadlines

Still with us? If that seemed like a lot of information, it's because it was. We're here to help you wade through the alphabet soup of retirement accounts and meet your deadlines. Of course, deadlines may differ for investors using LLCs or other business entities. The retirement and tax professionals at Royal Legal Solutions can offer you the best advice for maintaining your Solo-K's compliance.

How to Make a Lien Friendly & Protect Your Real Estate

Yes, there is such a thing as a “Friendly Lien." This is a lien against your property held by a party who is friendly to you. Ideally the “friendly party” is an LLC or corporation created in a jurisdiction (like Wyoming or Nevada) that allows you to use a nominee to make your involvement with the business anonymous.

The friendly lien will prevent potential litigants and creditors from pursuing the property since it’s "encumbered."  No sane lawyer will dive into a lawsuit before crunching the numbers. After all, why waste time trying to get a favorable judgment if you can’t get paid? This is why a friendly lien is a great addition to your asset protection toolbox. The lien will help make your property less attractive to predators.

But here’s the rub. It’s not foolproof and it can also end up being a quick lesson in how to lose money in real estate.

Friendly Liens Can Go Bad

You need to file a friendly lien the right way to avoid running afoul of the law. Offering a counterfeit lien or false instrument for recording can land you in the slammer in many states. Civil courts refer to it as “slander of title” and issue hefty fines for such actions.

So, what exactly is a bad lien? This is a lien that lacks economic substance. For instance, you shouldn’t claim that your LLC loaned you some money when it, in fact, did not.  The IRS and the court system won’t be forgiving. And you’d better hope you look good in black and white stripes if you go this route. Criminal penalties can include jail sentences of two to three years.

Using Friendly Liens the Right Way

You need to get a few things right to keep your property safe when using friendly liens. Unless, of course, your intention is to use the lien to obfuscate or defraud, in which case nothing will protect you from the law.

It’s Only an Asset Protection Smokescreen

The friendly lien only acts as a smokescreen. It will definitely not protect you from creditors coming to collect. If you have not actually borrowed any money from the LLC, then a friendly lien becomes a meaningless document. This is why we recommend a multi-pronged approach to asset protection for rental property owners.

Top 3 Types of Tax Professionals Real Estate Investors Should Be Aware Of

When dealing with life's only two certainties, it's hard to tell which is more painful: death or taxes. Death is painful no matter what. But fortunately, there are ways to actually minimize the misery involved with dealing with Uncle Sam. As a real estate investor, you already know how important it is to maintain adequate tax records.

Fortunately, you do not have to go it alone with only Quickbooks and TurboTax by your side. There are professionals who deal with this all day long that you can outsource your tax issues to while you focus on your investments. Here are the top three tax professionals you should know about, and what they can do to ease your pain come Tax Season.

1. Certified Public Accountant (CPA)

Accountants are a special breed of people. They commit their working lives to running numbers, and a good CPA will know the Tax Code inside and out. Accountants must be accredited by the state, take continuing education courses annually, and pass a difficult exam to verify their credentials. While many CPAs are knowledgeable about taxes because of their education, smart investors pick an accountant who specializes in tax issues. You want someone who deals with Uncle Sam and his rules on a daily basis to worry about your books so you don't have to. Our firm partners with such CPAs for this exact purpose.

2. Enrolled Agent

An Enrolled Agent (EA) is a professional who must pass a rigorous exam exclusively about IRS regulations and tax matters. Once they have passed this notoriously exam, they hold the distinction of being licensed to practice in every state in the Union. These professionals are also the only people who can represent you in IRS hearings without any type of limitations.

3. Attorney

We promise this isn't just our bias because we are attorneys ourselves. Here's a fact you may not know about being a practicing attorney: becoming an attorney is hard. We must not only attend law school, pass the State Bar, but also participate in continuing education so that we are up to date on state and federal laws. This includes tax matters.

The value of an attorney is in their knowledge and ability to advocate for you. In fact, any attorney can represent you for tax purposes. That said, you are best off selecting an attorney who specializes or has experience in tax law. Our tax professionals at Royal Legal Solutions are licensed attorneys who routinely assist investors like you with filing appropriately, understanding your tax obligations, and ensuring compliance with IRS regulations. Regardless of who you pick, a good lawyer is worth their weight in platinum. We can save your backside in a dispute with the IRS, but more importantly, we can prevent this situation from happening in the first place.

Bottom Line: The Pros Make Your Life Easier

You may use any of these professionals to assist you in preparing your taxes, if only to relieve the stress involved. Do your research on any person you add to your real estate dream team to verify their qualifications. This little bit of proactivity will ensure you are better protected as a real estate investor.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ

Don't Pay Taxes With Your Credit Card

If you have considered paying your taxes with a credit card, you're not alone. The urge can be strong, if only because of the convenience factor. Some investors are tempted to pay this way in a lower income year, or if they are unprepared on April 15th, because they feel it's the smart call to be billed at a later date. But doing so can have serious consequences. Let's talk about some of those repercussions, why you should never pay taxes with a credit card, and what alternatives you have.

Using a Credit Card Will Cost You More

The IRS penalizes taxpayers who pay with plastic heavily. Uncle Sam charges a "convenience fee" and may also hit you with every penalty the law and Tax Code allows. You could end up paying an additional 2.25% of your tax balance. Most of us don't have that kind of money laying around to donate to the IRS. On top of all that, your credit card company's interest will mean you're paying more in the long run anyway. With hefty interest rates on some cards reaching 20% or more, these costs can become astronomical. The longer you take to pay off the credit card bill, the more you will pay. The only "winners" in this situation are the IRS and credit card companies--not the taxpayer.

Paying Taxes With A Credit Card Damages Your Credit Score

Making payments with credit will affect your FICO score. This one mistake can follow you for years. Using large amounts of credit at once damages your credit, particularly if you have a hard time paying it off. The huge costs alone could also result in maxing out cards, which for most people means digging yourself into a deep hole of debt. Credit score damage has many real-world consequences, particularly if you are ever going to need a loan. But don't worry, there are better ways to get this job done.

Alternative Ways to Pay

Here are some of the options you have for ensuring you don't end up in nightmarish debt with the IRS.

Royal Legal Solutions Can Help You Manage Tax Issues

Whatever your reasons are for wanting to make your tax payment with a card, firms with tax attorneys like Royal Legal Solutions can help. Our tax professionals can evaluate your personal situation and help you determine the best way to make your payments.
 

What Are The Tax Filing Requirements of a Partnership?

Partnerships, and LLCs taxed as partnerships (MMLLCs), do not pay tax at the partnership level. Instead, their income and losses are passed through to the individual partners, and reported on their individual or corporate tax returns.
Despite the partnership not being taxed at the partnership level, it is still required to file its own tax return called Form 1065.

Filing Form 1065

On Form 1065, a partnership will report its income and losses for its business activities for the year. It will also report the assets and liabilities of the partnership.
To report this, you will need to provide your tax preparer a profit and loss statement, balance sheet, and any potentially additional supporting documentation.
Other common information reported on Form 1065 includes:

Partnerships may also have state filing requirements that will vary from state to state.

Schedule K-1

Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc. is completed and distributed to each partner. Each partner will then file their K-1 with their individual (Form 1040), or corporate (Form 1120 or 1120s) tax return. 

Filing Deadlines

Form 1065 is due March 15th, but can be extended to September 15th.
For corporate partners, Schedule K-1 must be filed on Form 1120 or 1120S, due March 15th, but can be extended until September 15th.
For individual partners, Schedule K-1 must be filed on Form 1040, due April 15th. This can also be extended until October 15th.

Related Issues & Tips

If you raise capital from Limited Partners (i.e. a syndication or fund), it is in your best interest to keep very clean records. This will help your tax preparer file Form 1065 and issue K-1s to those Limited Partners prior to the April 15th filing deadline for individuals.
This is a good investor relations practice that will keep your investors from continually asking for their K-1, make your company look professional, and increase the likelihood of receiving repeat investments and referrals from your current investors.
Since the partnership itself pays no tax, individuals will pay the 15.3% self-employment tax if applicable.

The Bottom Line

Even though partnerships do not pay income tax at the partnership level, they are still required to file Form 1065 by March 15th of each year.
Schedule K-1 reports each partner’s share of income, deductions, and other important information. If you raise capital from Limited Partners to fund your business or investment, it is a good investor relations practice to have your tax preparer file Form 1065 and distribute K-1s prior to April 15th.  

Author: Thomas Castelli, CPA is a Tax Strategist and member of The Real Estate CPA, an accounting firm that helps real estate investors keep more of their hard-earned dollars in their pockets, and out of the government’s, by using creative tax strategies and planning.

Pay for College With a Real Estate Investment Trust

Whether you have kids now or plan to in the future, paying for college is something you've no doubt thought about.

Real estate investors should be aware of the options they have when it comes to using their property to help pay for college tuition. In this article, we’ll discuss one method of paying for college tuition that doesn’t get much attention. This method involves utilizing a land trust to hold title to investment properties.

Set Up a Land Trust For Each Child

Once you’ve identified the investment property you’d like to use to fund future college expenses, make sure that the title to each of those properties is held in separate land trust. This is especially important if you have multiple kids because each child will serve as the beneficiary of his or her own separate land trust. Also, we’ve seen several cases where separating assets into their own individual entities, such as multiple “child LLCs” within a series LLC, has helped investors manage the impact of lawsuits.

Have Each Property Appraised

After ensuring that each child has their own land trust and is named beneficiary to that trust, have each property appraised at its current market value. Afterwards, sell an option on each investment property. Each child’s land trust will hold these options and accumulate the appreciation value of their respective properties.

Cash in on Your Real Estate Investment Trust for College

Whenever your kids are ready to head to college, you’ll be presented with two options. First, the kids can exercise their contractual right to sell the property in their land trust, using the money earned for tuition. Alternatively, you can buy the options back and use the profits for college expenses. Either way, parents can put their properties to work in accumulating funds for college rather than taking funds from their current income.

Manage Multiple Land Trusts With a Series LLC

As you can see, a land trust is not only useful in providing privacy when it comes to your wealth and assets, it can also be used to pay for your child’s college expenses. However, key to this method is putting each property in its own trust. This insulates each property from each other, so that a negative hit on one doesn’t impact the others. We specialize in managing multiple land trusts and LLCs within an entity called a series LLC. The land trust combined with a series LLC provides maximum asset protection. However, you’ll want to work with an experienced team of legal professionals to devise an overall asset protection strategy.

Advantages of a Self-Directed IRA

If you are looking to save money for your golden years, it is likely that you have heard of an individual retirement account (IRA). These accounts allow you to invest your pre- or post-tax dollars in mutual funds, stocks and bonds. However, if you are looking for more – you might want to consider opening a self-directed IRA, also known as a SDIRA. These special retirement accounts allow you to invest in alternative assets.

Advantages of a Self-Directed IRA

The advantages of a SDIRA go beyond those of a simple IRA account. Below are just a few of the reasons we recommend a SDIRA account to anyone interested in opening a retirement account.

Diversify Through Alternative Assets

One of the greatest draws of a SDIRA are the alternative assets you can invest in. Real estate, precious metals, and renewable energy sources are just a few of the options available to SDIRA owners. Private placements, foreign currency and many other things are also allowable investments. (In fact, the Internal Revenue Service (IRS) actually allows you to invest in much more than it restricts with a SDIRA!) Because of the greater investment options available to you, you have a greater likelihood of reaping a larger reward.

Tax-Advantage Account Rewards

A SDIRA is considered to be a tax-advantage account. If you open a traditional SDIRA, with pre-tax dollars, you can invest in alternative assets with tax-deferred dollars. This means you have more money to start your investment with. If you open a Roth SDIRA, with post-tax dollars, you can reap tax-free profits. Because you already paid taxes on these dollars, the growth and profits are potentially tax-free. (Speak with one of our experts today to learn more about what the different types of accounts can mean for your future!)

Asset Protection

Opening a SDIRA with a reputable firm, like Royal Legal Solutions, can ensure you know the best way to protect your assets. For example, Royal Legal Solutions makes it easy for you to open a business entity, such as a limited liability company (LLC) or business trust, with your SDIRA. By forming a SDIRA LLC or series LLC, you can shield your account assets and personal assets from lawsuits and bankruptcy rulings.

Total Control

The IRS specifies that any self-directed account is the responsibility of the account owner. This means you make all of the decisions. While your custodian acts on your direction, you can gain even more control. Through opening a LLC or business trust in the name of your SDIRA, you also gain checkbook control. This means you can make investments instantaneously without running it through your account custodian. Think that house at the end of the street is a great investment opportunity? All you need is SDIRA checkbook control. 

 

Three Reasons to Title Your Investment Property in a Land Trust and Not An LLC

In previous articles, we’ve discussed the main benefits of holding title to real estate investment property in a land trust. A land trust is just like a standard trust, except as the name implies, this type of trust holds title to real estate or real estate related assets.

Real estate notes, deeds and other agreements can be held in a land trust. A land trust can be recorded as either a revocable or irrevocable land trust. The majority of land trust are structured as revocable trusts. However, we’ve also had several inquiries lately about holding title to real estate investment property in an LLC.

While this is an option, based on our own experiences as real estate investors, we know of a few reasons why a land trust is a better title holding vehicle. In this article, we’ll discuss three reasons why you should title your property in a land trust rather than an LLC.

Land Trusts Offer Privacy

One of the main benefits of a land trust is that it offers privacy that you can’t find in an LLC. When you set up a land trust, you’re given the choice to create a name for each trust. This name can be anything, as long as it doesn’t infringe on copyrighted material. In the past, we’ve advised clients to name their trust wisely and in such a way that no personal connections can be drawn from the land trust title and those parties involved in the trust. This creates a layer of protection, since even if someone wants to attack one of your assets, they would have trouble connecting those assets to you. For record keeping purposes, a land trust is documented under its official land trust name. Uncovering ownership details behind a mysterious sounding trust like 321 CWL Land Trust may be more trouble than it’s worth. This is why a vague land trust name can be the secret to preventing lawsuits before they even start.

Land Trusts Can Help You Avoid Losing Everything With A Single Lawsuit

When you put the title to each property you own in its own individual land trust, it separates the liability associated with each. In contrast, if you hold all your property in a single LLC, it not only doesn’t provide anonymity but it also creates a scenario where an attack on one property can lead to an attack on the other properties. This is because all the property is held under the same shared entity. With a land trust, your potential losses are capped at each individual asset. Thus, potential lawsuits are managed, rather than in an LLC where all your hard earned assets are up for grabs.

Land Trust Titles Provide Efficiency

Lastly, a land trust provides efficiency when it comes to financing and selling your property. When each property is held in its own separate land trust, the financing or sale of one property doesn’t impact the other properties, as it may in an LLC holding multiple properties. Our legal team is highly experienced in how to protect and streamline the management of multiple properties. We can help you create a comprehensive asset protection strategy today.

401(K) Loans For Investment Property + Prohibited Transactions

For those who want to save for retirement, a 401(k) account can help. If you are self-employed and do not have employees, you have the option of opening a self-directed 401(k) account. Unlike most company-sponsored accounts, a self-directed 401(k) offers you investment options that go well beyond mutual funds, stocks and bonds.

In fact, your self-directed 401(k) allows you to invest in real estate—as well as precious metals, renewable energy sources, private placements and much more. This means your portfolio can be more diverse, allowing you to take bigger risks but reap much larger rewards. You can save much more at a faster rate for your future. 

IRS Regulations

The Internal Revenue Service (IRS) establishes regulations that govern all kinds of financial realities. The IRS strictly forbids certain types of transaction when it comes to your retirement account. Referred to as "prohibited transactions," these include very specific types of trades and actions the IRS considers “self-dealing.”

Your 401(k) is intended for future use, if you are under 59 ½, taking money from your account is considered an early distribution. This will subject you to regular income tax rates as well as a 10 penalty. However, unbeknownst to many account owners, the IRS does allow you to take a loan from your 401(k). Let's take a closer look

401(K) Loan For Investment Property

A loan from your 401(k) can help you take part in a transaction that the IRS would prohibit. This may sound sneaky, but there are certainly times when such a transaction may be necessary. Regardless of the reason for the loan, however, you should understand how to take one.

The first thing you should do is find out if your plan permits personal loans. Not all financial institutions will allow this. (If you have a self-directed 401(k) with Royal Legal Solutions, you are in luck! We recognize that your account is built from your money and investment choices and respect that. If you need access to a personal loan, we can help.)

If your plan allows for a personal loan, you will then need to apply for one. As the participant, you must apply for the loan; the Trustee will then approve it. (With a self-directed 401(k), you are both the participant and Trustee, so this part is easy.)

You should know that your loan is limited. You can request $50,000 or 50% of your entire account balance. (The IRS dictates that you can take the lower of those two, which means you will not be eligible for a $50,000 loan if your account balance is not $100,000 or more.)

You dictate your repayment plan. With an amortized loan, your repayment schedule must be five years or less. Your repayments must be made regularly. This includes weekly, bi-weekly, monthly or quarterly payments. (You cannot make a single lump sum repayment or semi-annual payments.) Your loan’s interest rate must be consistent with interest rates being applied to other loans.

 

Self Directed Solo 401k: How To Avoid Tax Penalties

Self-administering your retirement plan may sound daunting, but a self-directed solo 401(k) isn’t rocket science. Still, it does require strict compliance with both IRS and DOL regulations. Failure to comply can result in the IRS considering your retirement fund disbursed, penalizing you, and then taxing the disbursements. Be careful—the penalties can be high when you don’t strictly adhere to the guidelines!

The self-directed solo 401(k) can give real estate investors and the self-employed unmeasured flexibility in the types of investments they can hold in their retirement account.

Today, we’re going to focus on one aspect of self-administering a Solo 401(k): the segregation of funds.

Segregating Funds within a Self-Directed Solo 401(k)

Remember, 401(k)s are funded in various ways. There are funds that have been rolled over into the current plan, contributions made by you, and returns on investments, for instance. Suffice it to say, when all these funds are kept as one lump sum, it becomes difficult to show compliance with certain IRS restrictions.

As an example, there may be some instances in which you can hold life insurance in a 401(k). If all the funds are mixed, however, it’s that much more difficult to prove to the IRS that you are in compliance with their regulations. Now you have the IRS hovering over your retirement fund with the threat of penalties and disbursement looming on the horizon.

You also want to segregate pre-tax contributions from other funds within the account because it’s easier to show the IRS where this money went when you claim it at the end of the year. Roth funds, on the other hand, must be specifically designated as such. See also: Solo 401k Contribution Limits: What The Self-Employed Need To Know.

Segregating Funds is Simply Good Practice

Segregating funds helps keep your books more transparent. It may sound like a lot of work, especially when you’re your own trustee, but it works to your benefit and protects you from a possible audit. Being able to account for all funds in your retirement account will keep you in the clear with the IRS and allow you to easily show where all of the money in the account came from.

A self-directed solo 401(k) plan is a great investment vehicle and very versatile in terms of your investment options. But as the trustee, you’re responsible for anything that goes awry with the plan. With the proper planning and bookkeeping, you can ensure that you comply with all IRS regulations.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ

401(k) Contribution Limits In 2018

There is no doubt – the Internal Revenue Service (IRS) is the governing body when it comes to your retirement account. For 2018, the IRS did not make any major changes. However, any change, regardless of size, it worth knowing. This is especially true when they affect your contribution limits.

A Quick Note On Retirement Accounts

Before we get into the contribution limits for 2018, we want to make one thing clear. The limits imposed by the IRS on 401(k) plans apply to all types of these accounts. This includes your individual 401(k), self-directed 401(k), self-administered 401(k)s and more.

2018 Contribution Limits for 401(k) Accounts

The contribution limits below apply to both employees and employers. Let us take a look.

Other Types of Retirement Accounts

The IRS also sets limit for other types of accounts as well. Your health savings account, or HSA, is one such example. For individual HSAs, there was a $50 increase, which gives you a new total contribution limit of $3,450. Family HSA plans also increased. With a new limit of $6,900, these accounts have a $150 increase.

For individual retirement accounts (IRAs), however, the IRS has continued with the current contribution limits. These limits, established in 2013, remain at $5,500 for individuals under the age of 50. For individuals over the age of 50, the limit remains at $6,500 as well.

Stay Informed On Contribution Limits For 401(k) Accounts

One of the best ways to stay informed regarding your retirement account is to hire a reputable custodian. At Royal Legal Solutions, we do the homework for you when it comes to IRS regulations. Our professionals have years of experience studying and applying tax laws to help our clients avoid penalties and unnecessary fees. If you would like to learn more about retirement accounts, tax laws, or contribution limits, contact Royal Legal Solutions today!

4 Levels of Asset Protection for Real Estate Investors

Are your kids eyeing that expensive out-of-state college?

Do you want to see a larger return on your individual retirement account (IRA) investments?

Or do you want to quit working your 9-to-5 and start earning a profit on your own?

Whatever the reason, if you are looking to diversify your investment portfolio, real estate is a great start. However, this is a business that can bring you serious legal and financial headaches. That's why asset protection for real estate investors is so important!

Think about it: A simple slip on your property can lead to a court ruling that bankrupts you. A typical judgment will take into account medical damages, pain and suffering compensation, as well as other necessary expenses the injured party faced.

Your overall net worth will also be examined under the microscope.

Below, we take a look at the best ways to protect yourself and your real estate assets from court rulings and expensive judgments.

Understanding Your Current Real Estate Liability

When it comes to investing in real estate, your liability can land you in court. Regardless of the root cause, if you are found to be liable for damages or injuries – a lawsuit will likely follow. This is because, per the legal definition, liability means that you are responsible, or answerable, to the law.

Most lawsuits end with a settlement or judgment. In other words, the majority of lawsuits will result in you having to pay for whatever damages have occurred. When it comes to real estate, most of liability lawsuits result from accidents. (Of course, other lawsuits, such as fraud, do exist as well.)
By definition, accidents are something you typically do not anticipate. Unfortunately, that does not clear you of your liability. However, you can protect yourself and your assets from such lawsuits in several ways. This includes:

To figure out which protective actions you should take, let’s examine each of these individually. After all, every piece is unique and deserves a careful evaluation when you are building a real estate empire.

Is Real Estate Insurance Enough Asset Protection?

Consider insurance to be supplemental to the other ways to protect your assets we'll look at.

Insurance is your first line of defense when it comes to protecting yourself. There are limitations and benefits to the various insurance plans, so make sure you find one that works for you. Basics typically include accidents, like slips and falls. (If the accident is questionable, your insurance company may debate it with you. In most cases, the insurance company wins! So make sure you understand the scope of your policy!)

Typically, insurance providers will refuse to cover several different scenarios. Gross negligence is a big one. If the insurance company believes the accident was caused by something you “should” have known was an issue and did not fix, the fault is yours. Insurances also come with different coverage amounts. The majority of large judgments or claims, for example, will not be covered by the standard insurance plan. Financial disputes between contractors, venders or other such suppliers are not often covered by your insurance either. Oh, and a tenant dispute that involves things like liability, discrimination, rent or evictions? The majority of insurance companies will deny you coverage.

Example: In an ideal world, your insurance will cover damages before a lawsuit is even thought of. For example, a short-term injury caused by a slip and fall has an average settlement of $10,000 to $15,000. While a check for $15,000 seems like a lot, your insurance likely has a much higher ceiling. If this is the case, they will likely pay this amount and the case is closed. However, should a tenant fall from a balcony on your property and suffer serious, long-term injuries, the settlement will likely be much higher. Your insurance company will then investigate the fall, including the railing, regulations, and reason for the fall. If they feel the rail was not properly secured, or it was an inch below new state regulations, they will deem you negligent and refuse to pay the settlement. It will not matter if your tenant was inebriated or sleep walking once your insurance company finds you negligent.

At the end of the day, insurance is a proactive asset protection supplement. It can help mitigate some of the damages financially so long as they fall within your insurance coverage. However, because of the loopholes, it should not be your only means of protection.

Compartmentalization Of Your Real Estate Assets

Compartmentalization means that you separate your real estate assets from risks and liabilities that can cost you money. One of the best ways to do this is to establish a limited liability company (LLC) for each asset. These are called Series LLCs. They provide boundaries between assets and prevent lawsuits or judgments against one LLC from being able to take from another.

To understand how a LLC helps protect your real estate assets, let us first look at the benefits of the LLC itself. If you were to directly invest in a property, you and your personal finances would be subject to any court judgments. That means you could lose your home, car, bank savings, and other investments. In contrast, if you use a LLC to invest in a property, only the assets owned by that LLC would be subjected to any judgments. (In this sense, let us think of a LLC as a barrier wall. Anything outside the wall is considered off limits to the court.) Other advantages of forming an LLC for your real estate investments include less paperwork, less meetings, pass-through taxes, and flexible management and profit distribution.

Example: You’re a conqueror. You see potential in each of your real estate investments. As you invest in each property, you expand your real estate kingdom. Some you purchase in pristine condition. Others, well – they need a bit of work. Buying property is risky business. After all, there are inspections to pass, repairs to be made, and regulations to comply with. To help protect your assets from legal actions, you purchase each with a different Series LLC. Like the battle mounts around a castle, your Series LLC builds a wall around each of your investments. One of your tenants falls from a balcony on Property A (owned by Series LLC A). As the tenant, their lawyer, and court wages war against your kingdom, the walls protecting your other properties are impenetrable. Whatever the lob at the walls around Property B, C and D, you can rest assured nothing will get through. The only course of action they have is to go back to Property A and assess the worth of everything contained within the walls.

Limited liability. That is the magic phrase here. Because you cannot plan for every accident, investing through a LLC helps to limit your overall liability. Forming Series LLCs to isolate each asset from each other further protects your net worth. Why? Because each LLC builds a wall around the assets it owns. If a tenant slips on ice on one property, a Series LLC will ensure the courts can only gauge that specific LLC’s worth when establishing a judgment.

Legal Asset Separation (Use Of Shell Companies)

A shell company is the face of your business. It owns nothing, but legally appears to operate everything. Consider the traditional LLC to be an example of a shell company when it is owned by an Anonymous Trust. (We’ll talk most about these trusts in a moment.) As with a Series LLC, the traditional LLC allows you to keep your personal and business assets separate. This legally obscures your net worth. Additionally, it helps to insulate you from having your personal finances garnished if your business must declare bankruptcy or defaults on a loan.

Example: You’re still a conqueror. However, you build your wall around the entirety of your real estate kingdom this time. After your tenant falls, their legal team rides from village to village, pillaging your assets and reaping the benefits of your total real estate worth. If you have one property, however, they remain contained within a smaller area, unable to touch your personal assets outside of the wall.

If you only plan on investing in a single asset, the traditional LLC provides ample asset protection. It offers the same advantages of a Series LLC, however it provides you with only one barrier that contains all of your investment assets. This means, if an incident on one of your properties lands you in court, all of your business assets may be in trouble.

Assets Shielded By Anonymity

Anonymity is another layer of protection that can help you sleep better at night. To achieve true anonymity, we often advise clients to establish an Anonymous Trust before creating any type of LLC. Why?

An Anonymous Trust, also called a Land Trust, is made up of three parts. These are the grantor, trustee and beneficiary.

When you decide to establish an Anonymous Trust with my company (Royal Legal), we become your designated “nominee trustee” and file the required paperwork for you, thus eliminating your name from the records. Once filed, we resign as the trustee and you become the designated sole trustee.

This means that your name is never filed with the clerk. This makes it incredibly hard for lawyers to connect your Trust to the LLC, and thus, to the property.

Because your Anonymous Trust can then create a traditional or Series LLC, your name continues to be obscured. (An LLC will need to disclose the names of its members when it files its Articles of Incorporation with the state clerk. However, when an Anonymous Trust owns the LLC, only the name of the trust is listed in this document.) By adding this important layer to your asset protection plan, you can shut a lawsuit down before it is even filed.

Example: An anonymous conqueror makes the most of their kingdom. After all, who can the tenant and their legal party attack when they cannot figure out who is running the show? However, you decide to operate your kingdom, whether through a single wall or many, your crown sits securely in your safe, where no one knows to look.

Layer Your Assets With Protection

In 2001, DreamWorks’ Shrek told us, “There’s a lot more to ogres than people think. Ogres are like onions…Onions have layers. Ogres have layers.” As a real estate investor, you should too. We recommend a three-layer approach to real estate investing.

The problem with using only one level of protection with real estate investing is because of the dynamic nature of real estate itself. After all, most real estate lawsuits stem from accidents. Because you cannot plan for every potential accident, having layers ensures you remain protected no matter what happens. From lawsuit prevention, like acquiring insurance, to creating a legal obstacle course, like an Anonymous Trust, to help discourage lawyers from picking up a case – layers help stop a lawsuit before it starts. However, should a lawsuit actually occur, establishing boundaries through a traditional or Series LLC can help to minimize any judgments and protect your personal and business assets.

Have Confidence in Your Real Estate Asset Protection Plan

We want your real estate investments to be successful. To do this, you have to look at the bigger picture. This includes figuring out the best way to protect your real estate investments, your personal assets, and your name. Through years of experience helping our clients avoid lawsuits, our three-layer approach to asset protection has proven itself to be invaluable. Best yet, our experts streamline the process to ensure everything flows smoothly. We can help you set up an Anonymous Trust and establish your desired LLC structure. Alternatively, if you already have an LLC, we can assist you with rolling over your direct ownership to an Anonymous Trust to give you another layer of protection. If you would like to learn more about how we can help you keep your real estate assets protected, contact us today.

'Life Cycle' of a Retirement Plan: Setting Up a Solo 401(k)—And When To Shut It Down

When we talk about 401(k) plans having a life cycle, we mean that as literally as it can be meant. They are born, they exist, and then they’re terminated. It’s a useful analogy because it draws attention to the distinct stages of a 401(k) and creates a blueprint for managing it.

What is a Solo 401(k)?

Solo 401(k)s are the same as any kind of 401(k) but they’re for those who run their own business as sole proprietors. Typically, an employer would set up a 401(k) for you, but as a sole proprietor, you are the employer. You have to do it yourself. It may sound daunting, but it’s not as hard as you might imagine.

The Birth of the Solo 401(k) (How To Set It Up)

Let’s face facts. The economy is changing. Salaried careers still exist, but more and more folks are proprietors in the gig economy. That means they run a business out of their own homes or use their own capital and property to support themselves.

If that describes you, and you’re looking for options to save for your retirement, you should know that the 401(k) allows you to save more money than other kinds of retirement vehicles. As the “parent” of the plan, you must sign an Adoption Agreement. In order to do that, you must have an EIN (Employer Identification Number).

Setting up a solo 401(k) isn’t difficult, but there are quite a few forms to fill out. The second form identifies a Designation of Successor Plan or Administrator and requires a notary or a witness.

For individuals you will also need to fill out:

After all this, your solo 401(k) has been born!

The Operation or Execution (the Life) of Your Solo 401(k) Plan

First, you’ll need a place for it to live. Many people erroneously believe that the only place you can “house” a 401(k) is at a bank. That’s not true and it may not even be close to the best option available to you.

You’ll also need to nourish your solo 401(k). Remember that you can roll over funds from previously established 401(k)s or even IRAs.

You also don’t want to raise a delinquent child, so you will need to ensure that your 401(k) complies with IRS regulations. That includes reinvesting the money that your plan generations and being aware of which transactions are prohibited.

Death or Terminating Your Solo 401(k)

This is where we hope the parent/child analogy falls a bit short. The plan will terminate after the sole proprietor shuts down the plan and begins taking disbursements.

While the process can be managed on your own, it helps to have a financial professional on your side who can help ensure you remain in compliance with IRS regulations.

401K Plan Loans — Why 72(p) Can Assist Your Investments

People often wonder if they can borrow money from their 401(k) plans. The answer is yes, but there are a number of things to bear in mind when you do.

Firstly, the money that was paid into your 401(k) is your money, but it was allowed to accrue interest tax-free. In addition, money that you paid into the fund was tax-deductible. In order to enjoy that tax-deferred or tax-free status, you have to comply with specific IRS regulations.

When you take out a car loan, what happens when you don’t pay it back? They come and they repossess the car, of course.

Now, what happens if you default on a loan from your 401(k)?

The IRS will consider the 401(k) “distributed”. That means they assume you cashed out your account. Not only is the entire fund now voided, but you face a 10% penalty for cashing out early. You may also be forced to pay an additional capital gains tax.

Guidelines for Executing a Loan with Your 401(k)

401(k)s are not like savings accounts where you simply withdraw money and pay it back whenever. You must draw up a legally executable contract and that contract must follow IRS guidelines. The repayment plan must also conform to IRS guidelines. In other words, it’s risky to borrow against your 401(k), but it can be done, and safely.

401(k) Loan Limits

No loan taken from a 401(k) is allowed to exceed either $50,000 or half the vested balance, whichever is lower.

401(k) Loan Repayment Limits

The loan must be repaid over a period of no more than 5 years. Exceptions are made for loans used to purchase homes.

401(k) Loan Repayments and Interest

You can’t just float yourself an interest-free loan. The loan must be repaid on (at least) a quarterly basis with a legitimate interest rate attached to it. The loan must be 1% over prime and there must be an agreed upon amortization schedule.

Section 72(p) regulations are not meant to hurt you. They’re meant to help you. When you borrow against your 401(k) you are using tax-exempt monies that the IRS and the government have allowed you to set aside for your retirement. If you could just take money out of the fund then that would defeat the entire purpose of it.

Logistically, you’re borrowing the money from yourself and then paying it back with interest. Technically, however, you are borrowing money from a fund that enjoys tax-free or tax-deferred status. There are conditions for enjoying those exemptions.

Our recommendation is to tread lightly and know what you’re getting into before executing the loan. If necessary, have someone help you with the process.

Are Legal Expenses Tax Deductible for Real Estate Investors?

When it comes to legal expenses, what can and cannot be claimed as a tax deduction can be confusing. In fact, the answer really depends on the nature of the legal expense itself. Whether you’ve formed a series Limited Liability Company (LLC) or are using your self-directed 401(k) to make real estate investments, Royal Legal Solutions is here to help.

The Rules

The Internal Revenue Code (IRC) is the governing set of laws created to define what can and cannot be taxed. It is written by our US Congress and approved by the President. The IRC dictates that, with few exceptions, that you cannot deduct personal, living or family expenses on your income tax returns. (Itemized deductions are one of the exceptions.) The IRC does, however, allow the individual to deduct certain ordinary and necessary expenses that are paid throughout the tax year. These include:

Legal Interpretations of These Rules

How the Internal Revenue Service (IRS) views the laws established in the IRC can often seem convoluted. However, case laws have helped to demonstrate the legal interpretation of these rules. While there are other ways in which these rules can be applied, below are a few that are best related to the real estate investor’s interest.

Expert Services

The professionals at Royal Legal Solutions understand how complicated tax laws can be. As part of our expert services, we can help to prepare any tax filings related to your business or investments. If you would like to learn more about how Royal Legal Solutions can help, take our Tax Discovery Quiz.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ

IRS Form 5500-EZ: Needed To Terminate Solo 401(k) Retirement Account?

If you have a  self-directed, or solo 401(k)—or what the IRS calls a one-participant 401(k)—you already know the taxman requires you to report accounts with more than $250,000 in annual assets. This is done through the IRS form 5500-EZ.

If you are terminating a self-directed 401(k), whether it is associated with you as a sole-proprietor or through an entity you own, you also need to file a 5500-EZ form. In fact, once you close your account, the IRS gives you seven months to file. How does this work?

Step 1: Terminating Your Solo 401(k) Retirement Account

As the Trustee of your account, you are responsible for a great amount of the work related to terminating your plan. Transferring your funds to another retirement account, for example, is not the only part of a plan’s termination.

In order for you to be compliant with the IRS regulations, you will need to contact your plan document sponsor.  In turn, the sponsor will provide you with the necessary forms required for you to terminate your account.

Step 2: Filing with the IRS

Once you have completed the forms provided to you by your plan document sponsor, you will need to file the 5500-EZ Form with the IRS. This form, which can be downloaded from the IRS website, is relatively simple. However, hiring a reputable professional may be a good idea. Contact us if you need a referral or if you have other questions!

Land Trusts and the Garn-St. Germain Depository Institutions Act of 1982

As real estate investors ourselves, we understand how difficult it can be to keep up with all the compex legislation surrounding real estate. Today, we’ll discuss a piece of legislation that can seem intimidating at first, but is actually straight forward in its application.

The Garn-St. Germain Depository Institutions Act (Garn-St. Germain Act) was enacted October 15, 1982. The act, which was an initiative of the Reagan administration, enjoyed vast support and passed 272–91 in the House. Below is a quick guide on the connection between the Garn-St. Germain Depository Institutions Act of 1982 and land trusts, as well as how this act can impact your bottom line.

Avoiding the Due on Sale Clause with a Land Trust

The purpose of the Garn-St. Germain Depository Institutions Act is: "to revitalize the housing industry by strengthening the financial stability of home mortgage lending institutions and ensuring the availability of home mortgage loans." In pursuit of this, the act allows individuals to place their personal property in a land trust without triggering a due on sale clause.

A key exception found in the act that some use as a basis for avoiding the due on sale clause states: “A lender may not exercise its option pursuant to a due-on-sale clause upon a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.” (The Garn St. Germain Depository Institutions Act of 1982, (U.S.C.) 1701j-3(d)). Thus, the Garn-St. Germain Depository Institutions Act freed individuals to put their property in a land trust for estate planning and anonymous property ownership without fear of lenders calling their loan due.

Why You Shouldn’t Worry About the Due on Sale Clause

Banks rarely apply the due on sale clause if payments are being made regularly on a property. Banks profit of mortgage payments, thus if an individual is making timely payments, enacting the due on sale clause and possibly foreclosing on a property doesn’t make business sense. However, we don’t recommend relying on the individual business decisions of each bank. A more proactive approach would be to hold title to your property in a land trust, which provides anonymity, a savings on transfer taxes and potential avoidance of the due on sale clause. Our expert legal team can answer any questions you have regarding transferring property and establishing an asset protection strategy.

Unpaid Debt Can Take Your Tax Refund as a Real Estate Investor

At Royal Legal Solutions, taxes are always on our minds. We know what you are thinking. Tax season is months away! However, now is the time to start paying down any unpaid debt you may have. Why? Because certain types of debt will garnish your tax refund check before you even lay your hands on it.

How is this possible?

The Bureau of the Fiscal Service (BFS) is the Treasury Department branch that issues your federal tax refund checks. However, through the Treasury Offset Program (TOP), Congress has authorized the BFS to reduce your refund check in certain cases. In fact, the BFS can reduce or even take all of your refund and apply it to your unpaid debt.

Types of Unpaid Debt

Not all debt will result in the reduction of your tax refund. If you own on your mortgage, for example, your tax refund will not be affected. However, debt related to the below categories can result in a reduction.

What Happens

Being proactive now can help decrease the amount of debt owed, which can then prevent or reduce the likelihood of losing your tax refund. First, you should contact the BFS TOP call center. You can contact them at 800-304-3107 or TDD 866-297-0517 to inquire about whether your debt falls into any of the categories above.

If you fail to pay any debt that will be subjected to TOP, the BFS will likely reduce or take all of your tax refund in order to pay off the amount owed. If there is a balance after TOP garnishes your owed debt amount, the remainder will be issued to you as a check or through direct-deposit.

Furthermore, if the BFS reduces your tax refund, you will receive a notice with the amount and the agency that filed the claim. You can contest this amount by contacting the agency that filed for the offset.

What if Spouses Files Together?

If you file a joint tax return with your spouse, but they are solely responsible for debt, you may still be entitled to part or all of your refund. To do this, you will need to file Form 8379, also known as the Injured Spouse Allocation.

Speak With a Professional Today

If you are worried about the upcoming tax season, you should contact a professional today. For those who invest in real estate, which provides plenty of financial growth potential, figuring out your tax standing now can help you avoid losing your tax returns. At Royal Legal Solutions, our professionals are here to ensure you get the most you possibly can out of a tax return. Not only can we help save your taxes, our experts are able to better help you protect your assets. To find out more, please take our tax quiz to schedule a consultation with us today!