Taxes For An LLC: How the IRS Sees Your Limited Liability Company

If you're a real estate investor, you should be aware of how the tax code and the way you structure your business will affect how much money Uncle Sam takes from your bank account.

For example, the IRS has a lot to say about your Limited Liability Company (LLC) and how taxes for an LLC are handled.

If you don't already have one, it's time to create an LLC. Not only does owning your properties and other investments through an LLC protect you from liability, but it can also save you some serious tax dollars if you make the right elections for your business. 

Buckle up! It’s time to learn the basics of how the IRS sees your LLC and what the tax benefits of an LLC are.  

What Is An LLC?

An LLC is a business structure that offers its owners limited liability from the business’s debts. That means if you are the owner of an LLC, your personal assets are protected from any debts or obligations incurred by the company. You and your LLC are considered to be separate legal entities.

This type of legal structure is helpful for real estate investors because it's cheaper and easier to create than other entities like a corporation but still offers the all-so-crucial protection from personal liability.

The people or entities that own an LLC are called its “members.” There is no maximum number of members an LLC can have, and most states will allow single-member LLCs, which have only one member, to be formed.

LLC Tax Classifications

For the purposes of taxes, LLCs are considered “pass-through” entities. This means that LLCs do not pay taxes. Instead, the LLC’s profits are reported on its members’ income taxes. However, depending on the number of members in the LLC and the tax elections chosen for the business, the IRS will treat an LLC as a corporation, partnership, or a disregarded entity.

Disregarded Entities

If you own a single-member LLC, the default tax status for your business is called a “disregarded entity,” which means that the IRS ignores your LLC entirely and just considers its profits to be your personal income. This is the same way that the IRS taxes sole proprietorships. When you file your federal income tax return, you will also need to submit a Schedule C form, which details the profit or loss from a sole proprietorship. 

Many states also allow LLCs to be treated as a disregarded entity when the LLC is solely owned by a married couple. However, if you form a married-couple LLC in a community property state, it will be taxed like a multi-member LLC, so it’s crucial that you do your homework before making any decisions. 

Partnerships

The IRS will automatically tax multi-member LLCs like a partnership, which means that each member will receive a Schedule K-1 and include their portion of the LLC’s profits as taxable income on their personal income taxes. When LLCs are taxed as partnerships, each member must also include a completed Form 1065 for partnership taxation with their tax returns. 

Corporations

Although the default tax classification for an LLC is either a disregarded entity or a partnership, members of an LLC may choose to be taxed as a corporation by submitting Form 8832 (Entity Classification Election) to the IRS. For tax purposes, there are two varieties of corporations- S-Corporations and C-Corporations. 

Like LLCs, S-Corps are pass-through entities, where corporate income, losses, deductions, and credits are passed through to the business’s shareholders for federal tax purposes. With C-Corps, on the other hand, the business itself is taxed, and then each shareholder is taxed again on their earnings when they pay personal income taxes. 

C-Corps are generally not the best choice for an individual real estate investor, but, in some situations, an S-Corp can save you a significant amount of moolah on single-member LLC self-employment tax

While you must pay yourself a reasonable salary from the LLC’s profits, you can receive any income your business makes on top of your salary as a shareholder distribution instead of in a paycheck. Because the IRS considers distributions to be “passive” income, you don’t have to pay self-employment/ payroll taxes on the money you receive as a shareholder distribution.

However, this move only pays off if your LLC makes enough income to support a reasonable salary for yourself on top of shareholder distributions. Generally, this threshold is around $75K annually for a single-member LLC, but this can vary depending on your particular circumstances.

What Is The Best Tax Classification For My Business? 

Unfortunately, this is not a question that any blog or article can answer for you. Not even the all-mighty Google can give you advice on this issue. Because everyone’s circumstances are different, we strongly recommend that you meet with a business attorney or tax professional to discuss the tax classification that will save you the most money.

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

Selling a Rental Property: 3 Things You Need to Know

Thinking about selling a rental property? There are a few things you should know before you do. 

For one, the capital gains tax on a rental property is much steeper than it is on a primary residence. 

Also, when it comes to a tenant-occupied property, the process is a little more complicated. Your tenant, after all, still has leasehold rights. 

Finally, "as-is" clauses can protect you from a slew of costly lawsuits.

Now that you've gotten the "tldr" version, let's take a deeper dive ...

Capital Gains Tax: What to Expect

When you sell your property for a profit, you owe capital gains tax. The 2020 capital gains tax rates are as follows:

So, most of the time, you’ll end up paying at least 15-20% for capital gains tax. You’ll also have to pay capital gains tax on the amount that you claimed in depreciation over the course of your ownership of the property. If you claimed over $25,000 in depreciation, and you sold the house for $75,000 more than what you bought it for, then you’ll have $100,000 of total taxable capital gains.

If you just want the money, you’re going to have to pay the tax-man. However, if you’re looking to re-invest, there’s a strategy to avoid the capital gains tax.

Invest in Like-Kind Property

One way to get around the tax bill is to immediately re-invest the money into like-kind property, also known as a 1031 exchange. As long as you choose a new property in 45 days and close the sale within 6 months, the IRS allows you to keep the money you made in escrow, deferring capital gains, until you put that money into a new property.

You could do 1031 exchange after 1031 exchange, never having to pay for capital gains, as long as you hold the properties for longer than 2 years to avoid triggering “dealer status,” according to the IRS.

However, if you realize that you don’t want to be a landlord or you’re trying to raise money for another venture, you’re just going to have to pay the taxman.

Incorporate Your Real Estate Investments

Another way to avoid a sizable tax bill (albeit not entirely, of course) is to incorporate. You might have less access to the gains, but the savings on your tax bill will likely make this a desirable option regardless. There are some serious tax benefits to using an LLC structure. You might want to discuss the details with a qualified CPA.

Incorporating also helps you protect your assets from any liability issues, as well as protecting your anonymity.

How to Sell a Rental Property with Tenants Still Living There

What if you’re selling a rental property but there’s still a tenant living on premises?

The exact laws might depend upon your state, so check the Landlord-Tenant laws wherever the property resides, but you generally have a few options:

The easiest option, by far, is to wait for the lease to expire. You might want to check the lease for an early termination clause. That way, if you can prove that you absolutely need to sell, you might be able to break the lease.

Additionally, you could try to incentivize your tenant to move by offering them cash to cover the cost of moving. This is only a good option if you know that your property is going to sell for much more than you bought it for. If you’re cutting it close, you don’t want to cut it even closer by having to pay to get a tenant to move.

And, finally, you could try to find another real estate investor interested in buying a tenant-occupied property. The downside here is that your property is much less marketable. There’s a wider swathe of possible buyers for single-family homes, but a much narrower market for rentals.

As-Is Clauses Can Protect You From Costly Lawsuits

What is an as-is clause? An as-is clause is a condition clause: the buyer is purchasing the property “as-is.”

It typically states that “the buyer accepts the item for sale in its presently existing condition without modification or repair.” Without it, the buyer is relying upon the seller’s representation of the property. In some cases, that gives the buyer solid footing for a lawsuit.

Now, that doesn’t mean that the seller can engage in any knowingly misleading behavior, or attempt to hide a defect in the property, but it does provide additional coverage in case there are any disagreements. Sometimes there are issues with the property that the seller doesn’t even know about, but that won’t stop some buyers from filing a lawsuit.

To avoid the worst-case scenario, include an “as-is clause” in the sales contract when you’re selling your rental property.

Conclusion: What To Know When Selling A Rental Property

When it comes to selling a rental property, there are three things you need to know: 

1) The capital gains tax for rental properties is not the same as for primary residences, and it can take a serious chunk out of your potential profits. You might be able to avoid capital gains tax (or minimize it) in one of two ways. First, you could do a 1031 exchange. Next, you could incorporate to see if you can take advantage of certain tax benefits.

2) Selling a property with tenants still there is not an easy task.

3) When you do sell your property, make sure to include an “as-is clause” to avoid the potential for certain lawsuits. Interested in learning more? Read our article “The Rental Property Asset Protection Checklist.”

 

How The Qualified Personal Residence Trust (QPRT) Shields Your Home From Estate Taxes

A Qualified Personal Residence Trust (QPRT) is a specific type of irrevocable trust that allows you to remove your primary residence or another personal home from your taxable estate. While creating can be a QPRT complicated process, doing so lets you avoid estate taxes and reduce the amount of gift taxes you have to pay.

And guess what? When the feds take less, your heirs get to keep more of the wealth you’ve worked your whole life to accumulate. 

Keep reading to learn more about QPRTs, and when you're done, check out our article Three Ways To Properly Legally Protect A Personal Residence to discover more asset protection tips for your personal home.

qualified personal residence trust: young child catching football

How Does a QPRT Work?

For estates of several million dollars or more, a QPRT can allow you to keep the value of the home out of part of your estate that is subject to estate taxes. Although the QPRT is not used as often as other estate planning tools, it can save you a significant amount in taxes.

In order to create a QPRT, you have to transfer the title to your home to a trust. However, as part of the terms of the trust, you’ll include a provision that allows you to continue to live in the home for a specific period of time before passing to your heirs. The time in which you can continue to live in the home is known as a qualified term interest or a retained income period. So, while you won’t own your home anymore, you can still live there until this period expires.

How Does a QPRT Avoid Estate Taxes?

While there is technically no limit on how long you can keep your interest in the home, if you pass away before the end of your qualified term interest, the value of the home will be included in your taxable estate. So, you should always make sure the term chosen makes sense given your age and future life expectancy. 

If you survive until the interest expires, the title to the home will pass to your heirs and will not be included as part of your estate upon your death. After your heirs inherit the property, you can pay rent, relocate, or figure out other living arrangements. Any rent payments you make to continue living in the home will further reduce the value of your taxable estate. 

QPRTs and Gift Taxes

Although a QPRT can help you avoid estate taxes, Uncle Sam isn’t going to let you get off scot-free: the transfer of your home is subject to gift taxes. However, since you’re retaining a qualified term interest, the property’s gift value will be lower than its fair market value, which means you’ll owe less in gift taxes.

This deduction can translate to significant savings, particularly when younger homeowners set up QPRTs with extensive qualified term interests. The longer the retained income period, the lower the gift value of the home, the lower your tax bill from the IRS. Just remember that you have to outlive the qualified term interest for your heirs to reap the rewards of your estate planning. An experienced estate planning professional can help you decide on the most strategic term for your situation. 

Another way a QPRT saves you money is by avoiding gift taxes on appreciation. When you transfer your home to the trust, you pay the gift tax on its current value, even though the title won’t pass to your heirs for years to come. That means that any increase in your home’s value during your qualified term interest won’t be subject to the gift tax, which can also save you a substantial chunk of change.  

Why You Should Talk To A Pro

While the QPRT can be a great estate planning tool for shielding your home from estate taxes, it’s not the right solution for everyone. It’s important to keep in mind that specific requirements must be met to qualify for the tax savings. There is also a complicated set of special QPRT/grantor trust valuation rules for estate and gift tax purposes, which are outlined in Internal Revenue Code §2702 and related regulations. 

As with most estate planning strategies, you should consult with an attorney who specializes in this type of law to determine if a QPRT is right for your situation. An estate planning lawyer who knows their stuff can help you decide on the best methods for saving your money from the IRS, determine if you can qualify for a QPRT and make sure it’s set up correctly if you choose to take that path. 

 

Filing for Incorporation: What To Know About Making Your Business Legit

Most serious real estate investors eventually consider filing for incorporation to make their business legit. While the process can be complicated, it’s well worth the effort to protect your assets through incorporation.

Before we dive into the nitty-gritty of starting a corporation, it’s important to keep in mind that incorporation is only one option for making your business "official" in the eyes of Uncle Sam and the IRS. Depending on the circumstances, you might find that it’s preferable to form an LLC or Series LLC to protect your assets.

I recommend consulting with my team or another attorney specializing in real estate investing to make sure you choose the most advantageous option for your situation. Check out our article on Series LLC Rules to find out more on that front.

What Does It Mean To Incorporate Your Company?

When you incorporate your business, you form a corporation, which is a legal entity that is separate from its owner. Corporations are taxed independently from their owners and can be held legally liable for corporate actions. A corporation’s profit is separate and distinct from its owners’ income.

Corporations are created by state statute, which means that each state has its own requirements and regulations by which corporations must abide.

The owners of corporations are usually referred to as “shareholders,” and there is no maximum number of shareholders that a corporation can have. In most states, shareholders can be individuals, LLCs, other corporations, and foreign entities. Most states also permit an individual to form a single-shareholder corporation.

How Much Does It Cost To Start A Corporation?

To start a corporation, you will usually have to cover four different types of costs. These fees include a filing fee paid to the Secretary of State, a first-year franchise tax prepayment, governmental filings fees, and attorney fees.

Depending on the state of incorporation, Secretary of State filing fees can be a flat fee, determined by the number of shares authorized or a combination of both. Secretary of State offices typically charge between $100 to $250 for filing fees.

Franchise taxes are required by some states to be paid for the privilege of doing business as a corporation in that state. Franchise fees usually range from $800 to $1,000, but some states do not require this tax to be paid.

What Documents Are Needed For Incorporation?

To incorporate your business, you’ll need to file a few different types of documents.

Articles of Incorporation

Articles of incorporation are the legal document that creates a new corporation. To start your corporation, you’ll need to file articles of incorporation with the appropriate entity in your state. In many states, you’ll file with the Secretary of State, but this can vary.

The required information for your articles of incorporation to include can differ between states, but most states require at least the following info:

Every state will charge a filing fee, which generally ranges from $100 to $500. Once the state entity processes the articles of incorporation, they will send you a certified copy that confirms that your corporation has been approved to do business in the state.

Articles of incorporation are only required if you are forming a corporation. If you decide to go with an LLC, you’ll need to file a similar document called articles of organization.

Corporate Bylaws

Corporations must also establish corporate bylaws, which determine how the company’s shareholders, officers, and directors will divide authority and management in the business. The bylaws will also outline how the day-to-day functioning of the corporation will operate.

People often confuse articles of incorporation and bylaws, but they serve entirely different functions. While the articles of incorporation establish the corporation’s foundation, bylaws are much more detailed and explain how the corporation will be run.

Tax Election Form

For many businesses, it may be advantageous to be taxed as an S-Corporation instead of a C-Corporation, as income from a C-Corp is taxed twice. Because corporations are separate taxable entities, your business will have to pay taxes on its profits, and then you’ll have to pay personal income taxes on the money you make from your business.

An S-Corporation, on the other hand, is what is known as a “pass-through” entity. Because S-Corps don’t have to pay their own taxes, all of your business profits are passed through to your personal income.

The default tax election for all new corporations is a C-Corp. This means if you do nothing, you’ll be taxed as a C-Corp. In order to be taxed like an S-Corp, you will need to file Form 2553, Election by a Small Business Corporation, with the IRS.

Can I Incorporate Without A Lawyer?

While it is possible to incorporate without a lawyer, it is not recommended. An experienced attorney can guide you through the decision-making process and ensure you pick the legal structure that best suits your business. A lawyer can also help you hide ownership of a company to maintain your anonymity.

You don't have to call us to get this done—but please call someone who knows the law.

Section 179 Property Tips: How to Scoop Up Big Write-Offs

I work with savvy real estate investors day in, day out to give them strategies to protect their hard-earned moolah from Uncle Sam’s clutches.

One tactic many of them overlook is the Section 179 property deduction. With this write-off, you can deduct the total value of certain types of property instead of having to depreciate it over time.

Here's a rundown of how it works.

What Is Section 179?

Section 179 of the United States Internal Revenue Code (26 U.S.C. § 179) allows investors to deduct the cost of certain types of property in the year it is purchased and put into use.

Under the typical deduction process for property purchased as a business expense, tax law would require the cost of the property to be capitalized and depreciated over time. But with Section 179, you can write off the total cost of eligible property instead of having to wait for the property to depreciate.

While Section 179 write-offs can be used for various types of business structures, it is particularly advantageous when you combine it with the tax savings offered by an S Corp. With an S Corp Section 179, you get the benefits of pass-through taxation combined with tax deductions for your business expenses.

What Property Qualifies For A Section 179 Deduction?

Unfortunately, you can’t deduct all the property you obtain for your business using Section 179: only certain assets can be written off. To qualify for a Section 179, the business property must meet the following criteria:

It Must Be Tangible

To be eligible for a Section 179 deduction, an asset must be tangible personal property. In most cases, it will be equipment or office furniture, but other types of property can be deducted.

It Must Have Been Purchased, Not Leased

A Section 179 write-off can only be used only property that you purchase using business funds during the tax year, including loaned funds. You cannot deduct leased property, inherited property, or gifted property using Section 179. Financed property may be deducted, however, as you'll see in a bit.

The Property Must Be (Mostly) Used Specifically For Your Business

You can only deduct property under Section 179 if you use it for business purposes more than 50% of the time. If less than 50% of the use is for business purposes, you cannot use Section 179, which means you’ll have to depreciate the asset instead.

If less than half of the use of the property is for personal purposes, you can still deduct the purchase using Section 179. However, you’ll need to reduce the amount of your deduction by the percent of the time you use it for personal purposes and keep records of your business use of the property.

The Property Must Be Used During The Current Tax Year

You can only use a Section 179 deduction for property that was purchased, acquired, or converted to business use in the current tax year.

The Property Must Be Acquired From A Non-Related Party

You cannot use a Section 179 deduction for property purchased from a relative or another corporation or organization that you control.

What Property Does Not Qualify As A Section 179 Write Off?

The following types of property cannot be deducted under Section 179:

Limitations on Section 179 Deductions

There are also several limitations in place that restrict the amount of Section 179 deductions you can take in a single year:

Section 179 And Equipment Financing

Did you know that Section 179 also works with equipment financing? Many people don’t realize they can also use Section 179 to deduct the entire cost of financed equipment, thinking they can only write off the amount they actually paid. Fortunately, this isn’t the case! If you finance an equipment purchase with a loan, you can still deduct the total purchase price. And as an added bonus, you can also include the borrowing costs in your Section 179 write-off.

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

What Is Passthrough LLC Income for Tax Purposes?

There are two short answers to the title question: yes, and hell yes.

But don't just take our word for it. Passthrough LLC income is a hot topic in the investment community. If you're not sure what that means, you're not alone. Read on to learn about what exactly passthrough income is, how it impacts your LLC, and what benefits you will reap from it.

What is 'Passthrough' Income?

Passthrough LLCs allow you to collect the profits from your business as part of your personal income tax. The LLC itself is not taxed, but its owners are. This allows you to save substantially, simplify filing, and enjoy more of your hard-earned profits.

Businesses love this feature so much that at the time of this writing, roughly 90% of entities take advantage of passthrough income. While this access used to be primarily the domain of giant corporations, even the smallest business can also take advantage.

How Does a Passthrough LLC Benefit Me?

The most obvious benefit of passthrough entities is that it saves you tremendously on taxes. Opting out of passthrough benefits would mean you would essentially have to pay taxes on your income twice--both on your personal and your business tax returns. Few among us have the means or desire to pay the taxman twice. Fortunately, businesses don't have to if they take advantage of passthrough taxation. This is available for any type of LLC, including our personal favorite, the Series LLC.

What About the Taxman?

While passthrough has always had the benefits discussed above, there are even more perks you can take advantage of when Tax Season rolls around. Below are some of our favorite perks, along with a little update about the 2018 Tax Bill.

Can I Get Passthrough Treatment for Other Entities?

You bet! S-Corps, Limited Partnerships, and many other types of entities are eligible for passthrough taxation. Of course, we recommend the Series LLC for real estate investors. All of the information above applies to the Series LLC the same as it would to its Traditional counterpart.

That's all for our discussion of passthrough income for LLCs and Series LLCs. That wasn't too painful now, was it? You learned the basics in under ten minutes, but please feel free to reach out for personalized recommendations by taking our Tax Discovery Quiz below.

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

How to Get an Employer Identification Number (EIN) for a Foreign Entity

If you’re interested in any of the following, you’ll need an an Employer Identification Number (EIN), also known as a Federal Tax Identification Number:

The Internal Revenue Service issues IENs for corporations and partnerships to properly track their business activities for taxation and general monitoring. Here’s a full list of different types of businesses that are required to have an employer identification number.

Even if you’re a sole proprietorship, you still might want to get an EIN to protect your identity. You don’t want to go around handing out your social security number all the time, after all.

But what if you aren’t based in the US? Can you still get an EIN? If so, how do you get an EIN for a foreign entity?

Let's start with a basic question:

ein foreign entity

What is a foreign entity?

Before your business can operate in a state other than your home state, your corporation, LLC or other entity must qualify to “transact business” in that state, and is considered a foreign entity.

In general terms, any business entity not incorporated in your home state is considered a “foreign entity." A Series LLC in California is a "foreign entity" in Texas. For the purposes of this article, however, we're talking about an actual overseas business entity—not a business based in another state.

Previously established out-of-state businesses have typically already registered for an EIN from the IRS, so that California SLLC won't need a new EIN to transact business in Texas.

How to Apply for an EIN for a Foreign Entity

Quick and easy answer: review the information below, fill out the SS-4, and then call the international EIN helpline for the IRS at 267-941-1099 (which is not toll free).

To get an EIN as a foreign entity, you need to fill out Form SS-4, aptly titled, “Application for Employer Identification Number.” (The IRS’s internet EIN application is their “preferred method” for applying for most entities looking for an EIN, so if you stumbled upon this page and you’re not a foreign entity, start there). With that said, however, for international applicants, the IRS recommends calling the following non-toll-free number: 267-941-1099.

To do so, you’ll need the following information, at a minimum:

If you’re filling out the form online, make sure to follow the instructions very carefully to make sure the process is as smooth as possible.

Tips to Make Sure Your EIN is Approved

You’re only eligible to apply for an EIN online if you meet certain criteria:

If you don’t meet those criteria, call the number at 267-941-1099.

Why Do You Want to Apply for An EIN Even If You Don’t Have To?

Why might you want to apply for an EIN even if you’re, let’s say, a sole proprietorship?

There are a few reasons, and we touched on some of them in the intro, but we’d like to go over them for good measure here—as well as add some more:

An EIN allows you to file business taxes and avoid tax penalties.

There are certain tax breaks that are only available for businesses. Take, for example, the PPP loans as part of the pandemic. Many of them were even forgiven, so they were essentially grants for certain businesses.

An EIN can protect your Social Security Number.

Occasionally you might have to fill out forms for your business. If you have an EIN, you no longer have to use your more sensitive personal information to fill out those forms.

An EIN opens up a variety of business accounting options.

With a foreign EIN, business loans and business savings accounts are options for you to consider.

An EIN speeds up pretty much everything related to running a business.

With an EIN, you can more easily do everything you need to run a business, and if you’re a foreign entrepreneur, it lends you that much more credibility to US businesses and workers.

The Takeaway

A foreign entity EIN can have benefits, as we've seen. In order to get an Employer Identification Number for a Foreign Entity, you should look over Form SS-4 from the IRS, prepare all of the information you’ll need, and then call 267-941-1099. If you fill out the application online, your business needs to be located in the US or any US territories.

Which Type of Business Entity Needs an Employer Identification Number (EIN)?

Businesses pay taxes. It is a truth as old as time. However, how a business entity pays taxes vary. For many, the Internal Revenue Service (IRS) requires them to file for an employer identification number (EIN).

The EIN, also referred to as a taxpayer identification number (TIN), is a unique number assigned by the IRS that allows it to monitor any payments, wages, or other financial transactions that occur through your daily business activities.

Furthermore, if you plan to open a business bank account, an EIN will help you establish one that is independent of your own personal account. 

Does a general partnership need an EIN? What about an LLC taxed as a corporation? To find whether or not your business entity requires an EIN, keep reading.

does a general partnership need an einBusiness Entities that Do Require an EIN

Business Entities that Do Not Require an EIN

Business Taxes

The nuances of the tax world can be confusing and hard to understand. If you run a business and would like to discuss taxes with a professional, call Royal Legal Solutions today to set up a consultation. Our professionals have years of experience helping clients make the most of their business while remaining in compliance with all laws and regulations.

 

Interested in learning more? Read How to Get an Employer Identification Number (EIN) for a Foreign Entity and When Does a Sole Proprietor Need an EIN?

2021 Is A Critical Year for Estate Planning—A Trust Is A Great Start

Real estate investors were thrown a few curveballs last year, to say the least.

The stress and uncertainty of 2020 motivated a lot of you to stop procrastinating and get your financial affairs in order. Trust me ... Financial planners and asset protection attorneys have been working overtime.

On top of an unprecedented global pandemic, another election cycle brought the prospect of legislation that could change how our businesses (and our estates) are taxed.

With the current estate credit set to end in 2025, proactive business owners were calling us before COVID spread throughout the globe. But the events of 2020 have even more of you thinking about the gloomy prospects for recession, disability or death.

Whatever happens with the pandemic and the fallout for landlords, 2021 is shaping up as a critical year for estate planning because of President Joe Biden's proposal to lower estate tax exemptions. Biden proposals include limits to the gift, estate, and GST exemption amounts a taxpayer can take. According to The National Law Review, it is now more important than ever to create an estate plan or review the terms of an existing one.

Worried yet?

Don't be. As with many things in life, a little preparation goes a long way. You have a lot of options.

For example: Setting up a trust, which allows a third party—or trustee—to hold assets on behalf of your beneficiaries, can offer you valuable peace of mind. With a trust in place, your heirs will not have to go through the time and expense of probate. A trust also allows you to protect your assets, maintain privacy, and reduce estate and gift taxes.

Even if you have an estate plan in place, it is critical to update it each year to allow for life’s many changes, including births, deaths, weddings, divorces, illnesses, and children reaching the age of majority.

In this article, we'll examine one of the primary components of estate planning—selecting who will serve as your personal trustee. But first, let's look at the changes that 2021 could be bringing to the way estate planning attorneys like me handle our clients' affairs.

estate planning: biden changesWhat Estate Law Changes Will 2021 Bring?

Changes that impact the way we leave assets to our families are afoot.  These include:

The world is changing. Your family and your needs are changing. Estate plans should be updated every year to reflect these shifts, to give you peace of mind and preserve your wealth for your loved ones.

Creating a Trust Is A Great Start

Updating your estate plan for 2021 means finding ways to control where your assets will go should you die or become otherwise incapacitated. Establishing a land trust or another kind of trust can do exactly that.

Determining who will serve as your trustee is a key step. This individual acts as a fiduciary, overseeing the management of property owned by the trust. The person (or persons) you choose must have a clear understanding of the role. The primary expectations of a personal trustee include:

While those duties align with moral responsibilities, the position also comes with distinct hands-on tasks such as paying bills, reporting taxes, fulfilling obligations to beneficiaries, and following all compliance requirements. Making investments may also be part of the job.

Particularly with large estates, the trustee may be exposed to legal action by the beneficiaries of the trust. As you can see, the position or the offer of the position should not be taken lightly. You'll want to make sure the person fully understands the responsibilities and isn't blindsided with them after your death.

In addition to being a trusted friend or family member, a trustee can be a professional (such as your attorney) or an institution (like a bank). You also can to have an individual and an institution serve as co-trustees. A professional trustee can help shift the legal liability of the position away from the personal trustee while keeping them informed and part of critical decision-making.

How is a trustee compensated for their time?

Choosing who will serve as your personal trustee is an important decision. It should be someone who knows you well and who gets along with your family members. It's more than an honor; it's a serious commitment to you and your heirs.

Both personal and professional trustees are entitled to payment for their work. As you might expect, the compensation depends on the size of the estate and the amount of work the position requires.

There is no set fee for a trustee, and most trust documents and state laws state that trustees should earn a "reasonable" amount for the work. What is a reasonable amount? Here are some guidelines:

In some cases, a trustee may not want to receive financial compensation for their work. One consideration is that a trustee's remuneration is taxable as income. But family relationships also can enter into the picture.

For example, a relative may choose to forego payment for their time as a trustee because they view the position as a family responsibility. Others may think that accepting payment could cause friction or strain within the family.

curve ballThe Takeaway

With the rate of COVID vaccination increasing, many of us are looking forward to returning to some semblance of normal life in 2021. However, we would be wise not to ignore the wake-up call that the pandemic has given us to get our affairs in order. And thanks to legislative changes, investors are faced with a whole new ball game going forward. 

None of us knows what the future holds. No matter the size of your estate, you'll gain valuable peace of mind when you create or update your estate plan in 2021.

Strategies to Lower Capital Gains Taxes

Capital gains taxes are the bane of investors everywhere.

There's no wonder they stoke a little resentment among real estate investors: Uncle Sam likely had little to do with the profitability of your property. But you’ve still got to pay up.

And of course you should, but not without knowing a few of the ways you can lower your capital gains taxes or make their payments more manageable. Here are some of our top practical tips you can really use to handle cap gains taxes.

Can You Get Rid of Capital Gains Taxes?

Not entirely, at least not usually. But that doesn’t mean that they cannot be managed. What we can absolutely do is look at creative ways to lower our tax rates, ways to pay our taxes that will work out to our advantage, and any circumstance that could cut us a break. So that’s exactly what we intend to do.

The following are a selection of the tactics investors like you can use to make capital gains taxes more manageable. You may find one, several, or even a completely alternative method works best for you. Think of these techniques like tools in an arsenal that you can get out at will. In some cases you may find you’re able to get your costs so low as to be almost negligible. At the very least, you should be able to cushion the blow. Let’s talk about deferment first, then move on to some methods for reducing your overall costs.

REN 8 | Solo 401(k)

How To Defer Your Capital Gains Taxes

Since we can’t simply abandon our capital gains tax obligations, we have to approach the problem with a bit more nuance and creativity. While we can’t make the taxes disappear, we can absolutely put off paying them by employing various tactics. Let’s talk about some fan favorite techniques for deferring these payments.

The Clever 1031 Tax Maneuver: Drop and Swap

You can also use a 1031 Exchange to delay the problem of capital gains taxes. Now, if you go about using this method, you’ll want to bone up on the requirements for 1031 exchanges. Essentially, the idea is that as long as you’re willing to sell your property and use the proceeds to purchase a similar one, you can defer paying the taxes for as long as you have the second property.

Where you go from there is totally up to you. In theory, you can drop, swap, and swap again until the end of time if you can meet the basic 1031 rules. You usually have 180 days from closing to reinvest, for instance. Properties must also meet certain legal requirements. Learn more about using the 1031 exchange for real estate success now.

Pour Your Capital Gains into Opportunity Zone Investments

The U.S. designated certain economically depressed areas ‘Opportunity Zones’ in 2017. To attract investors like us, capital gains reinvested into opportunity zones get a few preferential perks:

Some creative and hands-off investors take advantage of funds known as Opportunity Zone Funds, which are usually collections of properties pre-selected by a firm, fund, or financial institution. This method may appeal to someone wishing to take advantage of these tax opportunities but lacking the time or ability to do thorough due diligence alone. It’s also a way to test the waters on this strategy if you’re considering incorporating it into your long term plan.

Strategies to Lower Capital Gains Taxes

While we can defer capital gains with many tools, there are ways to also simply lower the number. But you’re definitely not going to like all of them. Yet you may find lower capital gains taxes to be a silver lining in a less-than-desirable financial situation or as an unexpected result of your circumstances.

Here are some ways to reduce the overall tax burden easily.

Sell When Your Income is Relatively Low

If you’ve had a “low income year,” that’s actually a good thing for your capital gains tax rate. After all, it’s directly linked to your tax bracket and therefore your income. If you’ve had a year where you’ve only earned passively or simply not earned for any reason, this can be an ideal time to sell your property. You’ll pay less in taxes than if you sell when you’re in a better position overall.

Know What Expenses to Track For Primary Residences

If you’re planning to sell your home, you may be able to deduct certain expenses from your cap gains taxable income. Chief among these are any costs you pay to improve or renovate the property and any expenses associated with the sale of the property. Such expenses might include fees paid for professionals, appraisals, inspections, and of course, any upgrade--no matter how small--is worth documenting. As long as you document the expense, you can later use it to your advantage.

Let Your Asset Protection Entity Ride to the Rescue

We’ve talked before about the critical role your business entity plays in your asset protection plan And while asset protection is a completely valid reason to set up these types of business structures, you can also enjoy tax benefits on top of your peace of mind.

Which tax benefits, of course, will depend on the type of entity, whether you’ve made certain choices regarding how the entity is taxed during formation, and of course, the rules we all have to play by to keep our friends at the IRS nice and happy. But let’s take a look at an example, shall we?

Edmund Green is a Texas-based investor who uses a Traditional LLC shell company and asset holding company to defend his real estate assets and other valuables. He’d heard through the grapevine that asset protection entities could be used for equity stripping. Never one to just take anyone’s word for matters affecting his finances, Edmund decided to bounce the idea off of his CPA and was able to save himself far more than if he’d continued operating as a sole proprietor. With the help of his attorney, he has established his asset protection plan and it essentially hums along in the background while he lives his life and runs his business. The last time we talked to Edmund, he didn’t have any complaints. And his strategies can work for others, too. That said, it’s crucial that you ensure your asset protection plan is tailored to your personal needs and goals.

If you’d like to follow Edmund’s example, you easily can. Take a look at the structures you’re considering using for asset protection and do a bit of very basic research. More importantly, make notes of any questions you come up with as you read and learn for your own experts.

Bottom Line: Capital Gains Can Be Managed, and Often With the Same Tools Protecting Your Assets

When you establish entities, trusts, and other asset protection structures, you almost always have a tax opportunity. Do all investors take advantage of all of their opportunities? Certainly not. But some will go further for you than others. However you choose to handle your capital gains taxes, simply being aware of the opportunities at your disposal puts you a cut ahead of the clueless investor waiting to be blindsided by the problem. As usual, proactivity will place you in a better position than procrastination.

Is a 1031 Exchange Investment Strategy Right For Me?

1031 Exchanges offer real estate investors tax benefits and access to unique deals. Making the decision about whether using this strategy is the right move for you can be difficult. It’s important to understand the 1031 exchange process and consider the value of its benefits in your own situation. We’ve broken down some of the points we think are most important for investors to know below.

Are 1031 Exchange Solutions Tax-Free?

Not exactly. 1031 exchanges are tax-deferred. Suppose you swap out your current duplex for another. When you sell the second duplex, you will pay taxes on it. Of course, there may be ways to minimize your tax burden, and you should absolutely run questions on the subject by your CPA. But the point is, yes, if you keep within the rules, you can accomplish a tax-free transition of property. But the piper will eventually be paid.

Types of 1031 Exchange

All 1031 exchanges must conform to some basic rules we’ve covered before. Properties must be investment or business-owned (not personal residences), and the property acquired must be of greater or equal net market value than the one sold. Finding deals that will fit these terms can be challenging, but in many cases, worth it.

Traditionally exchanges must be executed inside of 24 hours. These are known as simultaneous exchanges. The logistical difficulties of finding and coordinating such deals mean that many investors opt for deferred exchanges, which offer more leeway on the timeline.

When Should I Do a 1031 Exchange?

If you're new to real estate, you may not yet know about the capital gains tax. This tax kicks in any time you sell a property at a profit, and avoiding it is one of the primary benefits of the 1031 exchange strategy.

If you’re in the position of having a valuable property for sale, congratulations. But the downside to this good fortune is the tax burden. A 1031 will offer relief here, at least for the time the new property is owned. But just know that if you use this strategy, it isn’t a permanent way around the capital gains tax. What the 1031 Exchange will offer investors selling at a high profit level is time. The use of the exchange means your gains will be deferred until the acquired property is sold

At that point, you may use other perfectly legal tactics to diminish capital gains taxes or even exchange the property again. For the creative investor, especially with an equally innovative attorney by their side, 1031 exchanges may play a role in solving a broad range of real estate “problems.” But to really get the most out of them, you’ll need some appropriate professional guidance.

Get an Expert’s Opinion Before Jumping Into a 1031 Exchange Deal

Are you considering making your first, or even yet another routine 1031 exchange deal? It’s never a bad idea to have a lawyer take a look. The time to do that is before signing anything. Never fear. Our skilled real estate legal team can assist you with any kind of real estate deal. If you’re considering a 1031 exchange and need to protect the asset--or any other type of real property investment--don’t hesitate to schedule a consultation with one of our experts.

What is a Partnership Return?

The LLC or Series LLC has the easiest tax returns for a single member. It's a "pass through entity," which means all of the income from the company can be reported on your personal income tax return.

You don't have to pay thousands of dollars to a CPA to file a business return. Great news!

This is also true for your spouse filing jointly. This can make tax preparation a lot easier.

Some states have specific tax rules regarding multi-member LLCs. For example, if you and a partner have an LLC, you may need to file a partnership return. This is a separate return for the business itself. You need a good CPA who knows about real estate investing to help you make sure you're doing it right.

Also note: In some cases, an LLC can be taxed as a corporation. In some cases, it makes sense to have your LLC taxed as an S Corps.

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

Using Your S Corp: Section 179 Deductions

If the title of this article is already making you yawn, I promise—this will be more exciting than you think. Why’s that? Because this article is all about SAVING YOU MONEY BY LOWERING YOUR TAXES.

Save Money? Lower Taxes? Tell Me More!

Now that I have your attention, let’s dive in. Using a Section 179 tax deduction with your S Corp allows you to deduct the full purchase amount of business equipment from your personal taxable income.

When a Section 179 deduction is personally allocated to you from an S Corp or partnership, the income and expense are “passed through” to you, and you claim it on your individual tax return. This means any income you earn from your S Corporation will be reduced by your Section 179 deductions, and you’ll only have to pay taxes on the reduced amount. 

Let’s look at an example to see how this would play out in real life:

Tom is a real estate investor who started an S Corp to hold his investments. He earned $100K in 2020 through the S Corp. Since an S Corp is a pass-through entity, Tom would typically have to pay personal income taxes on the $100K the S Corp made. However, if Tom has $20K of Section 179 deductible expenses, he’d only have to pay personal income taxes for $80K. 

Pretty spiffy, right?

s corp section 179How Section 179 Works

Section 179 gets its name because the rule is found in section 179 of the Internal Revenue Code. Essentially, this rule allows you to write off the full cost of eligible Section 179 property in the year it is purchased and put into use instead of deducting the depreciation over time.

This means you cannot take a 179 deduction on property purchased in a previous year, even if this is the first year you used the property for business purposes. For example, if you bought a vehicle for personal use in 2019, then converted it to a company car 2020, you cannot use a Section 179 deduction.

What You Can and Can’t Deduct

Property eligible for the Section 179 deduction is usually tangible personal property (usually equipment or office furniture) purchased for use in your business. 

Some common examples of Section 179 qualifying property include:

However, certain types of depreciable property are NOT eligible for a Section 179 expense deduction. Ineligible property includes:

Additionally, if you use property for both personal and business purposes, you can only use a Section 179 deduction if the asset is used at least 51 percent of the time for business. 

Section 179 Deduction Limitations

The total amount of purchases you can write off changes every time Congress updates IRC section 179 of the tax code. As of 2020, the maximum Section 179 expense deduction is $1.04M. 

In addition, this limit will be reduced by the amount by which the cost of Section 179 eligible property placed in service during the tax year exceeds $2.59M. This means if your business purchases and puts into use $2.6M, you’ll only be able to deduct $1.03M of these expenses using Section 179. The $10K overage on the $2.59M limit will reduce the $1.04M limit by $10K.

As a small business, I know you probably won’t come anywhere close to this amount of Section 179 expenses. But it’s always a good idea to know the rules, just in case.

Business Vehicle Deductions

People used to refer to Section 179 as the “Hummer Deduction” or the “SUV Tax Loophole” because many businesses took advantage of these deductions to write off the full purchase price of expensive vehicles. In response, the IRS severely reduced allowable write-offs for business vehicles. As of 2020, the maximum section 179 expense deduction for sport utility vehicles is $25,900.

Bonus Depreciation

If you can't write off an asset immediately, you have to depreciate it. You deduct a percentage of the value each year until you've written off the entire cost. 

It's also possible that you can take off extra for expenses that exceed the Section 179 limit, the first year as "bonus depreciation." Through 2022, the amount of bonus depreciation you can claim is 100%. 

Starting in 2023, bonus depreciation rates decrease to:

When you use Section 179 deductions with your S Corp, you can save a ton of money in taxes. Make sure you keep track of everything you buy for your business and GET THOSE DEDUCTIONS!

 

Interested in learning more? Check out our articles Using Your S Corp: Payroll Taxes and Getting The Most Out of Employee Business Deductions.

Self Employment Tax & The Independent Contractor

Paying taxes as an independent contractor can be a pain. The purpose of this article is to make it easier for self-employed individuals (such as real estate agents, brokers, and investors) to understand, calculate and plan for paying Uncle Sam the self-employment tax he is owed.

What Is An Independent Contractor?

An independent contractor is essentially a nonemployee, meaning a person or business entity that provides products or services to other businesses and is in business for themselves. This is in contrast to an employee, who works for an employer and is paid a certain wage or a salary.

Sounds pretty obvious, right?

According to the National Association of Realtors, there are about 2 million independent real estate agents and brokers in the United States. Each one of these individuals is a self-employed business owner, considered an independent contractor.

The Internal Revenue Service (IRS) has declared that real estate agents are "statutory nonemployees" for tax purposes. As such, they are considered self-employed and subject to self-employment tax, just like any other independent contractor.

What Is Self-Employment Tax?

Self-employment tax consists of Social Security and Medicare taxes for self-employed individuals. It is equivalent to the Social Security and Medicare taxes that employers are required to withhold from their employees’ paychecks.

Think of it this way: If you were working for an employer, you would have a certain amount of money withheld from your paychecks for Social Security and Medicare taxes. What you may not know is that your employer would also have to pay that same amount on the wages you receive.

Those required to pay self-employment tax include:

Independent contractors are responsible for paying both the employee's and the employer's portions of self-employment tax on their earnings. Also, rather than having the tax withheld from multiple paychecks throughout the year, independent contractors must pay self-employment tax as a lump sum, along with their income tax return in the spring, or by making estimated quarterly tax payments throughout the year.

Self-Employment Tax & Real Estate Investors

Investing in real estate is one of the best ways to create wealth and enhance your cash flow. For passive income investors, your rental income is not subject to self-employment tax. However, if you do several real estate transactions in a year, the IRS might consider you to be doing active business or trade rather than simply enjoying passive income from your real estate investments.

While the IRS treats everything on a case-to-case basis, if you earn more than half of your total income through real estate investments, the IRS may consider your earnings to be a source of earned income rather than passive income. Earned income is subject to self-employment tax and higher income taxes.

How you legally structure your investment activities can also affect how your investment income will be taxed. For example, investing in real estate as a C corporation, and paying yourself a management fee or salary can also trigger self-employment tax and higher income taxes.

How To Calculate Self-Employment Tax?

You calculate self-employment tax on Schedule SE (Form 1040). To do so, you must take 92.35% of your total net earnings (gross earnings minus any deductions) and multiply that figure by the current self-employment tax rate.

Currently, the self-employment tax rate is 15.3%, which is a combination of 12.4% Social Security tax plus the 2.9% Medicare tax. Therefore, the formula for self-employment tax is as follows:

SE Tax = (net earnings) x (92. 35%) x (15.3%)

For example, if you earn $10,000 in self-employment income in 2020, you will pay approximately $1,412 in self-employment tax ($10,000 x 0.9235 x 0.153 = $1,412.955). Likewise, if you earned $50,000, you would pay $7,064.775 in self-employment tax ($50,000 x 0.9235 x 0.153 = $7,064.775).

How Do I Pay Less Self-Employment Tax?

Self-employment tax can be a hefty price to pay for doing business as an independent contractor. The only way to reduce your self-employment tax is to reduce your self-employed income.

Shockingly, the IRS allows independent contractors to deduct a wide range of valid business expenses on Schedule C (Form 1040). Knowing what these deductions are and keeping good receipts and records can save you thousands of dollars.

Common expenses that can be deducted on Schedule C include:

Other expenses that individuals often forget to deduct on Schedule C are:

Your self-employed income and expenses are reported on Schedule C. The result of that form is the total self-employed income that gets transferred to the Taxable Income line on your 1040.

Why Become An S Corporation?

If you are an active real estate flipper or wholesaler, you are more than likely subject to self-employment tax. But you can save thousands in taxes by electing to be taxed as an S Corporation.

S Corporations (and LLCs that have elected S Corporation tax treatment) can be structured to minimize or avoid self-employment tax entirely. Also, as an S Corporation, you will not be obliged to pay federal income tax or corporate taxes.

For instance, you can structure your S Corp so that you only pay self-employment tax on a fair salary that you pay yourself, rather than on your corporation’s net earnings. Moreover, any distribution you pay yourself from the S Corporation will be completely exempt from self-employment tax.

Budgeting For Self-Employment Tax

As a rule, whenever you have income from sources other than a salary or wages, and you expect to owe $1000 or more when you file your tax return, you need to make estimated quarterly tax payments to the IRS to avoid penalties, interests, and a sizable tax bill at the end of the year. While it is best to consult with a tax professional to determine your quarterly tax payments, there are steps you can take to budget for your self-employment tax obligation:

Set Money Aside

After accounting for self-employment tax, set aside at least one-third or even as much as 45% of all your earnings in a dedicated savings account. This will help ensure that you have enough to make estimated tax payments each quarter.

Track Your Expenses

Remember, self-employment tax is paid on your net earnings, meaning the amount you have left over after you have accounted for all your expenses. So, be sure to keep accurate records of all your expenses to ensure that you are not paying more taxes than necessary.

Pay On-time

If you must submit estimated tax payments each quarter, make sure that you submit them on time to avoid penalties.

Consult With A Qualified Tax Professional

A qualified tax professional can help you determine what your self-employment tax liability will be and ensure that you pay your taxes on time. With the right preparation and advice, you will not be caught off guard when tax season rolls around.

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

What’s The Difference Between An S Corporation & A C Corporation?

If you’re trying to set up a business to hold your real estate investments, all the jargon and legal mumbo jumbo can be confusing. For instance, the internet is probably telling you to decide if you want your business to be an “S” corporation” or a “C” corporation,” but you don’t even know the difference between an S Corp and a C Corp. So how are you supposed to decide?

Don’t worry—I’ve got your back. Think of this article as your starter guide to deciding how your business should be structured and taxed.

Before you can choose between an S Corp and a C Corp, you need to understand the basics of how businesses are classified. 

There are two different levels of classification:

First, you’ll need to choose the type of legal structure you want your business to have (corporation vs. LLC), and then you’ll select how you want to be taxed (S Corp vs. C Corp).

difference between s corp and c corp girl walking down pathFirst Level of Business Classification — Legal Structure

State laws will control the process of forming a corporation or LLC. When you start a business, you’ll need to decide if you want to be a corporation or an LLC, which controls your business’s legal structure and has nothing to do with how it will be taxed.

Corporation

A corporation is a business entity that is legally considered to be entirely separate from its owners. Real estate corporations can be held liable for corporate actions and earn profits that are considered the business’s income and not the owners. 

Generally, corporations are:

Limited Liability Company

Like corporations, a Limited Liability Company (LLC) is also a separate legal entity from its owners. However, real estate LLCs provide more flexibility in management options and fewer record-keeping requirements.

LLCs are:

Side note: If you’re starting your business to hold multiple real estate investments, you may want to consider forming a series LLC, which allows you to hold your investments in separate “series” within the same LLC for maximum asset protection and convenience.

Should Your Business Be An LLC Or A Corporation? 

Whether an LLC or corporation is a better structure for your business depends on various factors, including your goals for your business and your desired management structure. You should consult with an experienced business attorney when deciding which type of entity is best suited to your ambitions.

Second Level of Business Classification — Tax Status

Once you’ve decided on a legal structure for your business, you’ll also have to choose how you want to be taxed: S corp or C Corp? Both corporations and LLCs have the opportunity to choose between the two tax statuses.

C Corporation

The IRS acknowledges C Corps as distinct taxpaying entities. This means that if you go with a C Corp, your business’ profits will be taxed like "personal income" of the corporation. You’ll have to file a tax return for the company each year. Any portion of the profits distributed to the owners will be taxed again as their personal income.

S Corporation

S Corps are what is known as “pass-through” entities. This means that S Corps themselves don’t pay taxes. Instead, the company’s profits (or losses) are passed through to its owners for tax purposes. 

Each owner will include their portion of the company's profits and losses on their personal tax returns and pay taxes based on their individual tax bracket. Additionally, S Corp distributions are not subject to Social Security taxes as long as you’re paying yourself a reasonable salary. Because of the advantages offered by S Corp taxes, many real estate investors elect this tax status for their businesses.

Default Tax Statuses

The IRS will assign a default tax status to your corporation or LLC if you don’t tell them that you want them to do something different. What your default tax status is depends on the type of entity you formed and how many owners there are. 

Default Tax Status For Corporations

When you form a corporation, the IRS will automatically consider you to be a C Corp.

Default Tax Status For LLCs 

When it comes to taxes, there’s no such thing as an LLC. By default, single-member LLCs will be treated as sole proprietorships, and LLCs with two members or more will be treated as partnerships. The LLC will be viewed as a "disregarded entity" and will not be taxed.

How To Change Your Default Tax Status

If you form a corporation and decide you’d prefer to be taxed as an S Corp than a C Corp, you can file Form 2553 with the IRS to change your corporation’s tax status. Similarly, LLCs can file Form 8832 and choose to be taxed like an S Corp or C Corp.

S Corp Versus C Corp

So, you can elect to be taxed as either an S or C corporation. Why would you choose one over the other? 

In short: If you are going to bleed your company dry, an S Corp may be better. If you are building a business and need to leave funds with the company to grow the business, a C Corp may be better. However, you should always talk to your tax advisor and your attorney to figure out which is best for your particular circumstances and goals..

When An S Corporation Is Better

An S corporation works really well when you’re taking all the money out because there’s only one tax level—at the shareholder level. That means the owner is the only one that’s taxed—the company is not taxed. This is the best option if you’re going to take all the money out of the business. 

When A C Corporation Is Better

There are also many advantages to going the C corp route, including a 21% corporate tax rate. In a state like Texas or Wyoming or Nevada (where there aren’t corporate taxes), you’re getting a 21% flat rate on all the money you leave in the company. The more you can keep in a C corp, the better off you will be because of the 21% tax rate.

In a C Corp, the corporation is taxed, and then, when money is distributed, it’s taxed again at the shareholder level. If you’re taking money out of the company, it probably should be as salary, because otherwise, you’re going to be double taxed.

What’s Next?

After you decide how to tax your business (S Corporation or a C Corporation), you need to pay yourself a reasonable salary. You’re going to want a bookkeeper. 

You’re an independent contractor employed by your business now, but you’ll have to correctly handle the withholdings. This includes filing the payroll tax reports. An experienced lawyer can help you get through this process and make sure you set everything up properly. 

 

Interested in learning more? Check out our articles Using Your S Corp: Payroll Taxes and Using Your C Corporation’s Tax Brackets To Reduce Your Tax Burden.

How You Can Bypass The 20% Withholding Tax On 401(K) Distributions Using Your IRA

You have to think of the IRS like they’re pirates out to steal your money. They want to get into your home. They want to carry off your daughter. They are the barbarians at the gate.

Our clients are wealthy investors who will pay their fair share when and where they are obligated.

But there are ethical and legal means to keeping more of their money, and it's our job to help them find those means.

Here’s one way to keep the government’s greasy fingers off of your retirement savings by bypassing the withholding tax on 401(k) distributions. 

Tax Advantage of Retirement Tax Savings

Your 401k is subject to a 20% withholding tax when you cash in. IRA distributions, however, aren’t subject to taxation at the time of distribution.

That means you have a head start against the pirates.

This is the easiest switch in the world. Dump your 401(k) into an IRA. To get started, check out our article, IRA Rollovers: Yes, Rolling Over Your 401(k) Into An IRA Is Smart!

Everything in your 401(k) is going to take this hit. But your IRA is all yours.

Now, this isn’t a complete get-out-of-jail free card. The real world isn’t Monopoly and you’re going to look like an idiot if you start wearing a monocle.

The tax owed on the distribution of an IRA or 401(k) is identical. You will still receive a 1099-R.

The difference is when you have to pay the piper. If you keep your 401(k), you pay the Man up front. 

The Difference 20 Percent Can Make

You may not think 20 percent is a big deal, but with a little creativity, 20 percent is going to add up. There’s nothing wrong with retiring on the beach. My buddy (we'll call him John) took $500,000 from his 401(k) and he went got himself a fine little spot with plenty of sun and plenty of surf.

My buddy Sam, on the other hand, talked to me first. So, when he pulled his half a million bucks out of his IRA, we figured out how to get him a beach house like John. We also figured out how to put a little boat at the end of the pier for him. Sam loves to fish, so we invested a little in a fishing business too. Sam doesn’t care if the fishing business makes any money, but he got to keep enough money to buy a boat and make it a business expense. He also got to retire with a nice expensive Dunhill cigar in his hand.

John only gets a nice smoke when Sam is feeling generous.

It’s no contest folks. IRA or give your money away.

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

Offshore Banking: Everything Investors Need To Know

The concept of banking has been around for about as long as civilization itself. 

In ancient Mesopotamia, temples and palaces often acted as financial institutions, lending seeds to local farmers to plant their crops. Once those crops were harvested, farmers would be required to pay back their seeds. 

Of course, banking has evolved since then. 

Today’s banks continue to provide loans to the communities they serve while giving people a safe place to keep their money. And while most people bank within their country of residence, which is known as “onshore banking,” today we want to look at the overseas alternative, offshore banking, and how investors use it to their advantage.

 

What Is Offshore Banking?

Offshore banking, like onshore banking, provides a safe place for financial customers to transact, but it offers additional benefits that traditional banking doesn’t. Many of these benefits make offshore bank accounts attractive, particularly to wealthier individuals. 

By definition, offshore banking is when a bank accepts and safeguards money from people who live in foreign countries.

When it’s explained in simple terms, offshore banking doesn’t sound so forbidding, does it? So why does the idea of opening an offshore bank account make some people feel like they’ll be joining the ranks of tax-evading criminals in Hollywood films? (We’re looking at you, Wolf of Wall Street!)

While it has gotten a bad rap, such as in the case of the Jersey accounts frozen by Lloyd’s Offshore Banking due to money laundering, the truth is that there have been many more regulations established among offshore institutions and, as a result, it has become more difficult for individuals to indulge in illicit behavior. See our article, Is It Legal to Have an Offshore Bank Account?, to learn more.

In reality, offshore bank accounts are not owned only by criminals portrayed on the silver screen, but also, and more commonly, by everyday people, from travelers to investors alike

Feeling better about the idea of opening an offshore account? Prior to reading the next section, take a quick moment and try to think of your priorities when it comes to offshore banking services. These might be lower tax rates, asset protection, higher interest rates, or just convenience to a place you frequently travel.

 

Benefits Of Offshore Banking

There are a lot of reasons why people might choose to bank offshore instead of confining themselves to domestic banking options:

 

Which Country Is The Best For Offshore Banking?

The best country for offshore banking depends on you and your needs. If you do a lot of business in Asia, Singapore might suit you best. If you’re worried about banks reporting your information, you might prefer to bank in one of the few countries which have not adopted the Common Reporting Standard (CRS), such as Georgia. 

If you want to open an account easily and with a low starting balance, Georgia also checks that box. If you’re looking mainly for asset protection, it’s what Swiss banks specialize in. 

And for the best tax rates around, you’ll find those in the Caribbean. More on that later!

There are quite a few offshore banking countries to choose from. Whether your priority when it comes to offshore banking services is lower tax rates, asset protection, higher interest rates, or just convenience to a place you frequently travel.

 

How Does Offshore Banking Work?

Offshore banking works pretty much like onshore banking, except that it is usually a bit more stringent. For example, in traditional banking you can just walk in with two forms of identification and an initial deposit, and most likely you will be approved. As you will see in the steps below, opening an offshore bank account is more of an in-depth process. 

Since we’ve already established some of the general concepts of offshore banking, as well as what your ideal institution (or institutions) would offer, let’s discuss what offshore banks are looking for when it comes to choosing their potential customers. To ensure that you are fully prepared for opening your offshore account, we’ve highlighted the main steps of the process below. 

Once you’ve completed all of the above steps and submitted any additional requested documents, the average turn-around time is five days. While each case is unique, these are the basic steps of opening an offshore bank account. 

Not too scary, right? Of course not! However, if this is your first time venturing out into offshore banking, I strongly recommend you consult with a professional organization that specializes in establishing relationships with offshore banking institutions. 

As we have established, more and more people are choosing to divide their finances among multiple institutions, particularly into offshore accounts, for a myriad of reasons. 

 

Why Is The Caribbean An Attractive Location For Offshore Banking?

What do you envision when you think of the Caribbean? Okay, I’ll give you about five more minutes to (reluctantly) put down your tropical cocktails and brush the beautiful grains of white sands off your feet.

Are you with me now? Great! Now apart from the impossibly gorgeous tourism, let’s talk about another reason why the Caribbean is so amazing. 

If you only know of, or have read about, offshore banking from the media, the Caribbean is most likely the first or second place that comes to mind. Why is the Caribbean so popular for offshore banking? Since the 90’s, it has been full of tax havens! Tax havens are these wonderful places where you incorporate your business, and, depending on the country, pay little or nothing in taxes. Additionally, many nations in the Caribbean have strict privacy laws and have refused to sign tax treaties with foreign governments. This means what happens financially in the Caribbean, stays in the Caribbean. Particularly for investors, low taxes and financial privacy are the major draws to the Caribbean. It also doesn’t hurt that it boasts some pretty breathtaking backdrops (care to take an impromptu trip to research these points in person?!) 

If you’ve made it this far into the discussion, I’m sure you can see just how straightforward offshore banking can be - just as long as you reflect upon your priorities, choose the right institution for your needs, consult a professional for legal advice, and most of all, be sure to report all of your accounts accurately because you definitely want to remain on Uncle Sam’s (or Johnny Canuck’s) good side!

 

How to Protect Yourself as a Real Estate Money Partner

One of the more elegant features of the real estate world is the way the whole ecosystem encourages symbiosis. Investors often are stronger together, especially in the face of an obstacle. For most investors, start-up capital or even cash flow to expand will become issues at some point in an REI career. Money partnership is one creative way REIs are helping each other by offering complementary skills to one another and combining forces on an investment. This is a clever way to square a capital issue or get help finding deals, depending on your role. Everybody wins when these arrangements work out. Here are some of the things you need to know to make sure yours does.

Money Partners and Credit Partnerships Explained

The money partner is the term for the person in this arrangement who has capital to spare. As for the person that has time or scouting skills or other resources, they are sometimes called the entrepreneurial partner. Other terms for these types of arrangements include credit partnership and partner funding.

Many of our investor clients are at the stage in their careers where they’re richer in capital than time. But don’t get discouraged, most beginners start out rich in resources other than cash. It may be your willingness to spend time researching, number-crunching, your day job skill set, or even your charm or tenacity--but there is certainly something about you that makes you valuable to another investor even if you’re cash-poor. Eventually, as your career progresses, your time will become “expensive” enough that you may assume the other role. Many REIs transition into mentorship.

How to Protect Yourself as a Money Partner

If you’re the “bank” in any kind of deal, you’ve got to look out for yourself. Money partnerships aren’t any different. You’re taking a risk, so of course you want to take the steps you can to mitigate that risk. Here are some of the most important tools you can use to keep yourself protected.

Option #1: Create Clear, Thorough Contracts

If you’ve got concerns about what your new partner may do if they’re not responsible in their duties. But that’s why the smart folks in our early legal system (and its predecessors) gave us contracts: to get everyone’s roles, responsibilities, and rewards in ink. Simply using basic contracts to solidify your verbal agreements can prevent nasty disputes, and even lawsuits, down the road.

If you have specific concerns, address them in the contract. Ask your attorney what some wise provisions would be given the specific fears or worst case scenarios you’re aiming to prevent. Odds are good you can rule out a lot of shenanigans by simply taking the time to create an effective contract. Anyone who wants to make money with you should be willing to sign a contract with fair, reasonable, comprehensible terms.

Option #2: Use Entities To Limit Your Personal Liability

Where a contract can’t always help you out is in the realm of lawsuits. Unfortunately, partners sometimes get bad blood. Deals sometimes don’t go as planned. Of course, most people get angry and play the blame game. Some people’s preferred venue for the blame game just happens to be the courtroom.

Don’t become a victim to your partner revealing themselves to be bitter or litigious. Protect yourself by creating an LLC and operating it in a manner to a venture-specific LLC. Use your Operating Agreement to clarify your relationship to as fine a degree as you like, and even divvy up profits and losses as you agree is fair. The great thing is you can have equal power if you like, or a money partner may want a greater share of profits. These are all the details you can get on paper when you file your LLC, but filing your LLC serves a second purpose: asset protection.

The LLC limits liability around real estate investments. Moreover, a Traditional or Series LLC separates you from the asset and its problems. You’re separate and no longer “own” it, but control it. What’s great about not owning something is it’s impossible to lose it in court. But of course, you retain legal control. Clever business structures can have many benefits on top of helping you CYA in a money partnership.

Tax Scams To Be Wary Of: The Dirty Dozen List, (7-12)

Thanks for joining us again as we finish our little explainer on the 2019 “Dirty Dozen” tax scams you need to continue to watch out for this year. Every year, the IRS releases a “watchdog” style document that lawyers,  investors, and even the Taxmen themselves call the Dirty Dozen. In Part One, we covered six IRS and tax scams to be on the lookout for. Let’s explore the rest of the list, and learn how to dodge the other six scams the IRS warned us about.

#7: Identity Theft Scams

Identity theft affects millions of Americans, and REIS can be at particular risk. Criminals get heated around tax season, trying to get their hands on your info for nefarious purposes like:

And many more no-good-nick activities. Stay safe and protect your loved ones by guarding all personal info closely, preserving your anonymity online and in your investing, and keeping your guard up during Tax Season.

#8: Nonsensical or BS Lawsuits

As shameless as it sounds, people assemble all sorts of insane cases against the IRS. Sometimes these enterprising (read: frivolous) legal minds devise cases that sound compelling to those of you who, say, don’t deal with tax law for a living. But if someone tries to recruit you for a class-action suit that sounds even a little harebrained, that’s because it totally is. Liability suits against the IRS do happen, but if you’ve got a good case, you need an attorney, not some jerk who’s calling you to hop on a grimey business-side-of-lawsuits-bandwagon.

#9: Phone Scams

Seniors, you’re at particular risk of phone scams. They go something like this: you get a call from a stranger with impressive-sounding credentials and a totally unique secret way to beat the Taxman. Just ignore this nonsense, because there’s also a more common and serious problem of people making calls claiming to be IRS personnel. Don’t fall for it.

Avoiding this scam is easy: The IRS doesn’t make phone calls. Period. Just hang up stat--and if you have a real concern about your taxes, you can locate the real office you need on irs.gov

But we all get weird calls, and here’s how to handle them: never give out personal information to strange callers. If you suspect your caller’s a robot, ask them directly (“Hey, are you a cyborg?) to see if you’re talking to a person or recording. Often these scammers are lazy, and your vigilance about avoiding strange callers’ demands and documenting without complying will keep you safe.

#10: Lying About Your Income

This can be a form of preparer fraud, but most of the time, the taxpayer is responsible. Falsifying income in any way is a horrible idea, so just don’t do it. There’s no benefit worth the trouble you can get into.

#11: Bogus Business Credit Claims

Brought to you by the geniuses who invented return padding, the practice of improperly filing business credit claims is widespread. Usually, the taxpayer just plain doesn’t qualify but takes the credit, or asserts a right to it anyway. It’s a spin on a false deduction, basically.

#12: Illegal Tax Sheltering

You can minimize taxes using many legitimate and legal strategies, as well as entities and other legal tools. But to do this, you’ve got to play by the rules. Often these problems come in the form of shady businesses promising high or even improbably huge savings. Any business directed at hiding from Uncle Sam is basically begging to get into a nasty tax dispute, and they WILL drag you into it  With so many legal options for decreasing tax liability, there’s no excuse for illegal tax shelters. Or getting busted.

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

Tax Scams To Be Wary Of: The Dirty Dozen List, (1-6)

The IRS released its 2019 scam watchlist, affectionately known as the Dirty Dozen. What should you watch out for during this year’s tax season? Learn the latest below, and remember, it’s okay to be skeptical of any officer claiming to originate from the IRS.

#1: Illegal Use of Off-Shore Accounts

We’ve shared before about the legal use of off-shore banking, which is safe. Unfortunately, anyone illegally convincing you to use off-shore accounts to evade taxes is dragging you down a dark path. Should you follow, you’ll pay the price.

#2: Phishing Attacks

Phishing is better known as “that scummy move where people send convincing-looking fake emails to steal your log-ins.” For those unfamiliar with Scumbaggery, you’ll get an email that looks like it’s from, say, Your Bank. But it isn’t from Your Bank. It’s from some jerkface who wants you to believe he’s Your Bank, so you’ll unwittingly give him Your Banking credentials.

Watch emails closely. Unless you know someone personally, don’t take identities for granted online. An email from yourbank.com that’s consistent with other emails from Your Bank isn’t a phishing attack, and there’s nothing wrong with calling Your Bank (or whichever institution the caller claims to represent) to confirm.

Phishing preys on the implicit trust we have in our institutions and your laziness. Phishers hope you don’t look closely at the email. Awareness is your best defense.

#3: The Bogus Tax Return (Preparer Fraud)

You can avoid this one by simply ensuring your tax preparation professional is qualified and ethical. CPAs usually won’t pull this move, but fake pros crop up every year, sadly.

#4: Refund Scams

This type of preparer fraud involves shady characters claiming to be experts promising you absurdly high refunds. This should set off your BS detector--vet the provider or switch if this offer isn’t the first red flag.

#5: The BS Charity

We hope there’s a special place in the afterlife for people who invent fake charities. But hey, it’s their souls--just don’t donate to one or it’s your behind on the line. Uncle Sam can’t get your money back. Further, deductions toward fake charities don’t count, which leads us to...

#6: Return Padding and False Deductions

Yeah, people really try. Unethical preparers have been busted cooking books or creating a laundry list of bogus undeserved deductions to get a huge refund, usually to “earn” themselves a cut. The scam and how the preparer profits may vary. Consider this your fourth consecutive warning to be careful who you let do your taxes.

Including you. Many individual taxpayers have taken liberties with deductions, and even outright invented false deductions. There are times when ethical people are tempted to break the rules in life. But when you’re filling out a tax return isn’t one of those times. Save your rebellious side for the stage, the canvas, the negotiating table, the board room, the bedroom, or really anywhere that won’t get you into a hot mess with Uncle Sam. That’s not legal advice, by the way--that’s just good old-fashioned American common sense.

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

Tax Consequences For Section 280A and Airbnb Vacation Rental Assets

Do you have properties you’re using as vacation rentals, short-term, or mid-term rentals? If so, or if you are considering listing part or all of an investment property on Airbnb or any other online platform, this article is for you. Vacation rentals have become an increasingly popular way to maximize profits on investment properties. That said,  to run your vacation rental business legitimately, you need to be certain to cross your “t”s and dot your “i”s. Because this type of use is a fairly new byproduct of the gig economy, regulations and laws can change quickly. Even the insurance industry has caught up at this point. So of course the Tax Man has. The smart investor must be mindful of not only their state and local legislation, but also how these types of investment properties are taxed. Here’s our little crash course on the subject to get you started.

What Type of Airbnb Host Are You?

Of all the questions that will help determine your tax responsibilities vis a vis Airbnb profits, this is both the most qualitative yet critical. Your answer is the difference between “not a penny owed” and “Get out your checkbook.”

Depending on which of these two criteria you fall into, you may not have to report at all:

  1. Your home is only on the Airbnb platform for 14 days or fewer of the calendar year. Pocket your funds and enjoy the thrill of beating the system. No reporting necessary.
  2. Those who rent their home over 15 days out of the year--including spare rooms, part of the home, etc.--will have to report any income derived from such rental on Schedule E of their tax return.  

Section 280A is the part of the Tax Code that makes these definitions for personal and rental use and otherwise lays out the rules investors must play by. Fortunately, it isn’t all bad news though. Here’s a quick breakdown.

What is Section 280A? Does it Matter to Me?

Section 280A of the Internal Revenue Code isn’t just a novel way to kill conversation during date night--it’s the Taxman’s guidebook for how you get to use your home in the course of business. In fact, Section 280A has made a cameo right here on the RLS blog before in our breakdown of the Home Office Exemption (a worthy read if we may say so ourselves).

If you’re renting your home or any piece of it for profit for fifteen or more days annually, then Section 280A matters to you. This is the portion of the Tax Code that will dictate what must be reported, which records matter, and perhaps most importantly for lots of you, which deductions you can take on your short term rental real estate business. If you’re considering entering this market, it’s wise to become hip in the ways of managing your records and taxes. You’ll find yourself coming back to 280A in some form or fashion a few times before Tax Season is over.

Get in the Habit: Accurately Report AirBnb Income and Expenses

Regardless of how long you plan to be in the vacation rental game, one area you cannot get sloppy on is bookkeeping. Now don’t worry, there are no new fancy systems to learn here. You’re free to self-organize to your heart’s content. Here’s what the Tax Man cares about if you’re hosting over fourteen days out of the year:

Now, Airbnb might report your earnings. They have to, beyond a certain point. Airbnb users with over 200 individual transactions or earning in excess of $20,000 within a year can expect Airbnb to report these figures. This is yet another good reason to always start with the records you have on the platform itself, but keep your own for accuracy reasons. You may be one of the many users that falls somewhere in between “occasional” and “frequent.” Whatever your situation, keeping your own records guarantees you’ll have at least one full set of documentation.

What Deductions Can I Take as an Airbnb Host?

Fortunately, there are tax benefits as well as obligations that you may enjoy related to your vacation rental business. This is why documenting expenses can be so critical to maximizing your tax savings on these properties.

You probably already know there’s a bit of overhead to hosting, and in some areas, quite a lot. That’s why these types of expenses are generally deductible on your taxes:

Basically, if it’s a real and justifiable business expense, you can likely use it as a deduction too. If there’s some unique cost related to your property, make a note of that. It never hurts to ask your CPA about costs like specialty insurance or anything you explore explicitly for your short term or vacation rental business. These are all possible--not certain--deductions you can exploit. Your asset protection entity may also be of assistance in managing taxes, so be sure to let your relevant professionals know how you control the rental asset. If you live in the home, this may not apply directly, but it’s still good to know where the divisions between your personal and business-owned assets are.

How Can I Bolster My Vacation Rental Business’s Chances of Success?

Following the above advice to the letter is a great start. But on top of excellent record-keeping, there are some other pro-tips to keep in mind when you establish your Airbnb or short-term rental business. Here are a few to get you started.

Offer Excellent Service

This may seem obvious bordering on cliche, but it also happens to be the truth. If two businesses offer the same product or service for the same price, how do you decide who to go with?

Really?

Think about it for a moment.

Now think about what would make an outstanding vacation rental. Really practice empathy and put yourself in the position of your likely traveler demographic. Write down everything that comes to mind, and aspire to offer the level of customer service you’d expect in a place twice as nice as what you’re offering. Hosts who go the extra mile tend to be rewarded on the Airbnb platform with designated statuses, high booking rates, and even featured listings. Truly offering the best experience of the space you have available, whether it’s a humble lodging for a solo traveler far from home or a beach condo for a family getting away from it all, will make you stand out on the platform and with your clientele. So go the extra mile.

Expect the Unexpected & Offer Simple, Thoughtful Solutions

Airbnb has lots of great advice for hosts. You can expect to go through more things than an average household: linens, cleaning supplies, trash bags, even certain food and beverage if you offer it. Get all the free information you can, but also plan for emergencies.

Here’s a common one few will warn you about: the need for an extra mattress. A $40 Walmart mattress not only could bail a guest out of a bad situation or furniture malfunction: it also counts as an extra bed to offer future guests. Think ahead about common mishaps, and if you can’t anticipate them, at least try to be available to respond. Consider also the types of items people forget when traveling. How many times have you found yourself without a hair dryer (an actual amenity you can list on Airbnb, for the record), deoderant, feminine products, contact fluid, Advil, or some other cheap but oh-so-essential item? After all, those are things you tend to need quickly when you need them. Keeping guest bathroom drawers stocked with such basics will put anxious guests (or those who meet a traveling misfortune) at ease.

Bonus: Those loving gift baskets? You can write all their contents off later.

Have a Plan for Responsiveness

We all know nonsense just happens when you travel. Planes are late. Layovers extend. Baggage gets lost. These types of situations can leave new Airbnb travelers feeling especially nervous. But the beauty of the platform is that you become that person’s touchstone to the city. If you cannot personally manage your Airbnb offering, it really is a good idea to get some full-time assistance.

Responsiveness is actually measured by the Airbnb app. Hosts with high levels tend to perform better. If you aren’t able to manage your property alone, recruit a friend, family member, or even friendly graduate student to help. Offer them a fair price to help you out wherever you need. Maybe that’s just a modified maid service, maybe it’s help maintaining your account, or even a hybrid of the two with your own needs mixed in. Just be sure that if you do hire an individual, you are clear on their role as a contractor. It never hurts to solidify even the most informal relationships with a solid contract.

Choose the Right Professionals for Help

Knowing when you need a lawyer or CPA can be critical. The smartest investors generally have a real estate attorney involved when it comes time to buy, sell, or transfer property. Many will set up asset protection systems in advance but also use their attorney for advice on growing their business. CPAs are more essential for tax-specific questions, though you will generally find real estate attorneys are at least aware of the issues likely to affect clients.

Nonprofessionals can also be helpful to you. Form your own personal-professional network of fellow Airbnb hosts, and don’t be afraid to make a few “aspirational friends” along the way. You know, the kind you want to be like. Following in the footsteps of someone who has had success is a good way to learn the industry quicker--and see your profits faster.

Lower Your Capital Gains Taxes

Capital gains taxes are the bane of investors everywhere.

There's no wonder they stoke a little resentment among real estate investors: Uncle Sam likely had little to do with the profitability of your property. But you’ve still got to pay up.

And of course you should, but not without knowing a few of the ways you can lower your capital gains taxes or make their payments more manageable. Here are some of our top practical tips you can really use to handle cap gains taxes.

Can You Get Rid of Capital Gains Taxes?

Not entirely, at least not usually. But that doesn’t mean that they cannot be managed. What we can absolutely do is look at creative ways to lower our tax rates, ways to pay our taxes that will work out to our advantage, and any circumstance that could cut us a break. So that’s exactly what we intend to do.

The following are a selection of the tactics investors like you can use to make capital gains taxes more manageable. You may find one, several, or even a completely alternative method works best for you. Think of these techniques like tools in an arsenal that you can get out at will. In some cases you may find you’re able to get your costs so low as to be almost negligible. At the very least, you should be able to cushion the blow. Let’s talk about deferment first, then move on to some methods for reducing your overall costs.

Deferring Your Capital Gains Taxes - How To

Since we can’t simply abandon our capital gains tax obligations, we have to approach the problem with a bit more nuance and creativity. While we can’t make the taxes disappear, we can absolutely put off paying them by employing various tactics. Let’s talk about some fan favorite techniques for deferring these payments.

The Clever 1031 Tax Maneuver: Drop and Swap

You can also use a 1031 Exchange to delay the problem of capital gains taxes. Now, if you go about using this method, you’ll want to bone up on the requirements for 1031 exchanges. Essentially, the idea is that as long as you’re willing to sell your property and use the proceeds to purchase a similar one, you can defer paying the taxes for as long as you have the second property. Where you go from there is totally up to you. In theory, you can drop, swap, and swap again until the end of time if you can meet the basic 1031 rules. You usually have 180 days from closing to reinvest, for instance. Properties must also meet certain legal requirements. Learn more about using the 1031 exchange for real estate success now.

Pour Your Capital Gains into Opportunity Zone Investments

The U.S. designated certain economically depressed areas ‘Opportunity Zones’ in 2017. To attract investors like us, capital gains reinvested into opportunity zones get a few preferential perks:

Some creative and hands-off investors take advantage of funds known as Opportunity Zone Funds, which are usually collections of properties pre-selected by a firm, fund, or financial institution. This method may appeal to someone wishing to take advantage of these tax opportunities but lacking the time or ability to do thorough due diligence alone. It’s also a way to test the waters on this strategy if you’re considering incorporating it into your long term plan.

Methods for Reducing Capital Gains Taxes Entirely

While we can defer capital gains with many tools, there are ways to also simply lower the number. But you’re definitely not going to like all of them. Yet you may find lower capital gains taxes as a silver lining in a less-than-desireable financial situation or as an unexpected result of your circumstances. Here are some ways to reduce the overall tax burden easily.

Sell When Your Income is Relatively Low

If you’ve had a “low income year,” that’s actually a good thing for your capital gains tax rate. After all, it’s directly linked to your tax bracket and therefore your income. If you’ve had a year where you’ve only earned passively or simply not earned for any reason, this can be an ideal time to sell your property. You’ll pay less in taxes than if you sell when you’re in a better position overall.

Know What Expenses to Track For Primary Residences

If you’re in the position of selling your primary home, you may be able to deduct certain expenses from your cap gains taxable income. Chief among these are any costs you pay to improve or renovate the property and any expenses associated with the sale of the property. Such expenses might include fees paid for professionals, appraisals, inspections, and of course, any upgrade--no matter how small--is worth documenting. As long as you document the expense, you can later use it to your advantage.

Let Your Asset Protection Entity Ride to the Rescue

We’ve talked before about the critical role your entity plays in your asset protection plan And while asset protection is a completely valid reason to set up these types of business structures, you can also enjoy tax benefits on top of your peace of mind.

Which tax benefits, of course, will depend on the type of entity, whether you’ve made certain choices regarding how the entity is taxed during formation, and of course, the rules we all have to play by to keep our friends at the IRS nice and happy. But let’s take a look at an example, shall we?

Edmund Green is a Texas-based investor who uses a Traditional LLC shell company and asset holding company to defend his real estate assets and other valuables. He’d heard through the grapevine that asset protection entities could be used for equity stripping. Never one to just take anyone’s word for matters affecting his finances, Edmund decided to bounce the idea off of his CPA and was able to save himself far more than if he’d continued operating as a sole proprietor. With the help of his attorney, he has established his asset protection plan and it essentially hums along in the background while he lives his life and runs his business. The last time we talked to Edmund, he didn’t have any complaints. And his strategies can work for others, too. That said, it’s crucial that you ensure your asset protection plan is tailored to your personal needs and goals.

If you’d like to follow Edmund’s example, you easily can. Take a look at the structures you’re considering using for asset protection and do a bit of very basic research. More importantly, make notes of any questions you come up with as you read and learn for your own experts.

Bottom Line: Capital Gains Can Be Managed, and Often With the Same Tools Protecting Your Assets

When you establish entities, trusts, and other asset protection structures, you almost always have a tax opportunity. Do all investors take advantage of all of their opportunities? Certainly not. But some will go further for you than others. However you choose to handle your capital gains taxes, simply being aware of the opportunities at your disposal puts you a cut ahead of the clueless investor waiting to be blindsided by the problem. As usual, proactivity will place you in a better position than procrastination.

Tax Responsibilities for Airbnb Hosts & Vacation Real Estate Investors

The vacation rental industry has been booming for some time now, with no signs of slowing down. In fact, it’s how some people get into real estate: by realizing the income from renting a room in one’s home is pretty nice. More investors and ordinary folks are taking advantage of platforms such as Airbnb to maximize their real estate income. If you’re one of them (or thinking about becoming a host), you should be aware of your tax obligations. Here’s the quick and dirty guide for the vacation rental investor.

14 Days: The Magic Number

One simple way to avoid extra tax expenses is to limit vacation renters to a two week stay annually. The Tax Code only kicks in the costs discussed below for visits over this time period. So if you, say, are an occasional user of Airbnb or tend to only have very rare short guests, you won’t need to report the income. But here’s the catch: you can’t deduct your business expenses on unreported income.

When Do You Have to Report Income From Airbnb?

If you meet the following conditions, you must report and pay taxes for your vacation rental business:

  1. You have guests on your property for over 14 days.
  2. You occupy the home for over 14 days of the year or 10% or more of the days you’re renting.

If you live in the home you’re renting, that means you will have to distinguish which portion of the mortgage is related to personal vs. business use. Property taxes and interest will also be recorded on Schedule E of your tax return.

You May Get a 1099 From Airbnb

Airbnb might send you a 1099-K, the type of 1099 for third party transactions. If Airbnb withholds funds for any reason, you’ll also receive notifications of withholdings at your mailing address.

Not everyone gets a 1099-K from AIrbnb. However, if you earn over $20,000 or make over 200 reservations in a single tax year, you will receive one. Airbnb will also report your earnings.

Other Tax Issues for Vacation Rental Investors to Note

Everything discussed above pertains to federal law. But Airbnb investors must also conform to state and local regulations. Airbnb and vacation rental regulations change fairly rapidly and vary dramatically from jurisdiction to jurisdiction.

The best thing an investor can do to ensure they are complying with all state and local laws is to  acontact a qualified real estate attorney. A small fee for a bit of legal advice that could keep you away from a tax dispute is totally worth it.