Getting the Tax Benefits From Sec. 199A for Rental Real Estate

The Tax Cuts and Jobs Act (also known as the Trump tax reform) implemented Internal Revenue Code Section 199A, which offers a deduction of up to 20% of the income for most businesses. Historically, whether rental real estate has met the tax code definition of a “trade or business” has not been a question of much substance, since rents are not subject to the self-employment tax. However, since the 20% haircut is only available for businesses, it’s important that rental real estate owners make sure that they will qualify as such.

During January, the IRS has released regulations outlining a safe harbor that rental operators can use to document their qualification as a business. Even for those owners that can’t meet the safe harbor, these regulations reveal how the IRS is going to think about Sec. 199A for rentals. The IRS has specifically declined to take a positioning deeming all rental activities to be businesses.

The Tax Cuts and Jobs Act safe harbor has three requirements:

(1) The owner must maintain separate books and records for the real estate enterprise. A real estate enterprise can be composed of multiple properties; however, an enterprise, for this purpose, cannot contain both residential and commercial properties, and properties subject to a triple net lease or that the taxpayer uses personally for more than 14 days in the year cannot be included.

(2) 250 hours of rental services must take place within the enterprise each year. These services can be performed by the owner, employees, or, crucially, by independent contractors. Rental services include advertising, leasing, verifying applications, collection of rent, repairs and maintenance, management, purchasing materials and supplies, and supervision of employees and contractors. However, rental services do not include property acquisition, arranging financing, reviewing financial statements, planning or constructing long-term capital improvements, or travel to and from the property.

(3) Starting for 2019, the owner must keep contemporaneous records detailing the dates and hours services were performed, description of services performed, and names of who performed the services. This requirement is waived for tax year 2018.

This safe harbor will require some adjustment on how rental operators, management companies, and subcontractors track their time. Owners will have to be proactive to get time information from people they hire, so that they will be able to reach the required 250 hours (roughly five hours a week). Owners are required to include a statement verifying, under penalty of perjury, that they have the required records, and the risk of audit in upcoming years could be significant. It will be critical to maintain timely, accurate records to avoid having any issues with the IRS.

Failure to meet the safe harbor does not automatically disqualify rental owners from taking advantage of Sec. 199A. The determination of whether a rental activity is a business is made by the facts and circumstances of each unique situation. Factors at play include the type and number of properties rented, the owner’s day-to-day involvement, any ancillary services provided under the lease, and the terms of the lease.

If you don’t believe you will reach the safe harbor for 2019, but you might be close, there are things you can do. While most leases for single-family residences pass lawn maintenance to the tenant, the landlord can add an extra 25 to 50 hours a year to the tally by hiring their own lawn service and passing the cost to the tenant. Other repairs and maintenance that have been contracted out can be done by the owner or by relatives, typically for lower cost and more hours.

Minor repairs and maintenance that would be done in future years can be accelerated into 2019, especially if the owner anticipates acquiring more properties. The owner can spend additional time studying market comparisons to set appropriate rents.

It will be critical for landlords with fewer properties to capture all their eligible time spent on their rental activities, and to not be shy about getting names and hours worked from contractors hired to maintain their properties.

Accurate, easy-to-follow records are the best defense against any IRS issues, so take advantage of this safe harbor and get that 20% deduction!

Capture Every Dollar Of Tax Savings In Your Real Estate Business

We make it cheaper and easier to own real estate. Work with us to make sure you get every dollar you’re entitled to.

Real Estate Investment Tax Strategy and Compliance

Get things set up right. Acquisition is often the most complicated piece. We go through your payments and closing statements to get everything in place and capture very dollar.

Accelerate deductions. It can take a long time to recover costs in real estate. We work to get your rehabs deducted up front. We work with cost segregation experts to help you save money up front.  Do more deals with more money in your pocket.

Including your overhead. We don’t forget your other costs. Office expenses, mileage, marketing, and other overheard costs are all deductible. Work with us to capture overhead expenses to your maximum benefit.

Work with confidence. Work with people who know real estate. We have experience working with real estate investors of all types, from single family landlords to commercial syndicates. We know what we are doing.

Real Estate Investment Accounting Solutions

We can handle your record keeping and reporting, giving you more time to find deals and make big money. Our cloud-based platform gives you access to reporting as you need it. Forget worrying about debits and credits.

Real Estate Investment Tax Strategy Solutions

Learn how to build a better mousetrap and get ready for a brighter future.

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How Independent Contractors Should Make Tax Payments

The Right Amount at the Right Time

Filing and paying your taxes looks a lot different as an independent contractor than it does as an employee. Let’s talk about how a contractor calculates their income and tax due, and then we’ll go over the timing of how a contractor should make tax payments.

We Get to Deduct Things?

Contractors have a much easier time deducting work-related expenses than employees do; in fact, starting in 2018, most employees can’t deduct unreimbursed work expenses at all. A contractor can deduct unreimbursed expenses directly against the related income on Schedule C, and only pays income and self-employment tax on the net income amount. Here are some expense items you can likely deduct:

Home Office Expense Tax Write Offs

Most contractors work from home. If you have a part of your house you use to conduct your work as a contractor, you can deduct a portion of the expenses of your home. You can either deduct a flat $5 per square foot (Line 30 of Schedule C), or you can deduct expenses based off the square footage of your office versus the square footage of your home (Form 8829.)  Expenses you can allocate in this manner include mortgage interest, real estate taxes, rent, insurance, utilities, repairs and maintenance, and HOA fees. You can also depreciate your home for this purpose and deduct that as a home office expense; see Part III of Form 8829.

Office Expenses Tax Write Offs

You can deduct the expenses of setting up and maintaining an office. Your computer and accessories, software, pens, paper, and other typical office expenses are deductible.

Phone and Internet Tax Write Offs

You can deduct a portion of your cell phone and internet bills for the percentage you use them for business.  Be reasonable; the IRS can require you to substantiate the percentage you have chosen.

Licenses and Education Tax Write Offs

If you have a professional license, you can deduct your annual license fees. Whether or not you have a license, you can deduct costs you spend on continuing education, books, and other materials that help you expand your skills related to your contracting job.

Travel Tax Write Offs

If you have to make unreimbursed travel, you can deduct plane tickets, hotel rooms, and 50% of the cost of your meals while you are away from home. You can also deduct driving - for 2018, it’s worth 54.5 cents a mile.

Other Tax Write Offs

The items above aren’t an exhaustive list. The legal standard for a deduction is whether or not it is an ordinary and necessary business expenses - as in, would a reasonable person consider the expense in question? If you have big items you’re not sure about, talk to a CPA and get some extra wisdom.

How Much Taxes Do Independent Contractors Pay?

Contractors pay two different types of tax as part of their annual Form 1040 filing. One is the standard income tax, the same as everyone. The net business income is added to other sources of income (W-2s, interest, dividends, rents, etc.) as part of the calculation of taxable income. The second is the self-employment tax, which is a replacement for both the employer and employee portions of the Medicare and Social Security taxes paid by employees. The self-employment tax is a flat 15.3% on net self-employed business income up to $128,400 for 2018, and 2.9% on amounts above that. This tax is added to your income tax to determine your total tax liability.

Oh, You Expect Me to Pay Now?

Since there is no withholding done when payments for services are made, a contractor has to make tax payments directly to the IRS. Generally, the IRS requires that payments be made in quarterly installments through the year, which are called estimated tax payments.  You must pay the lesser of 90% of your current year tax, or 100% of your prior year tax (110% for people with prior year adjusted gross income over $150,000) in four equal installments throughout the year to avoid the estimated tax penalty. The penalty is currently 6% (adjusted for changing ainterest rates) on the daily outstanding underpaid balance, so if you have to choose between paying the IRS or paying off credits cards or other short term debt, the IRS can usually wait.

Any amounts not paid in as estimated tax payments need to be paid by the April 15 filing deadline. Even if you get an extension, an extension of time to file is not an extension of time to pay. Amounts not by paid by April 15 will incur a penalty of 0.5% per month of the underpaid balance, plus interest, so try to pay what you owe by the deadline.

How to Handle Tax Planning in a Bear Market

Tax planning can be a critical component of your overall investing strategy. At Royal Legal Solutions, we love finding novel ways to help our investor-clients save tax money. We firmly believe that you can and should find and exploit any possible tax breaks. Below, we’ll explore some ways to save and share the details of some of the methods you can use.

Tax Tactics: When the Stock Market Takes a Hit

The reality is that the stock market will always eventually take a hit. With the lengthy bull run, the market has experienced over the past decade has been a boon for many investors, nothing good lasts forever. The question isn’t if the market will correct. It’s when.

Fortunately, we can be prepared even if we are blindsided by a loss at the moment.

The Tax Swap

If one of your most significant stocks or sectors takes a major blow, your gut instinct might be to cut your losses and pull out of the market. But you can actually keep your money in the market, minimize the damage, and reinvest more wisely by employing a technique known as the tax swap.

To execute a tax swap, simply sell off your poor performers. The tax loss can be used to lower your capital gains or even overall income, while any money from the sales can simply be reinvested back into different funds or stocks. This is a great technique if you’re wanting to stay in the market or your sector for the long haul.

Thoughtful Portfolio Diversification and Research

Yet another essential part of planning for a bear market is ensuring your portfolio is adequately diversified. As real estate investors, many of us think in the long term. Yet time and again, we see investors continue to over-rely on the notoriously unstable stock market.

When plotting future diversification, take the time to evaluate the tax implications of your options. As you explore your choices, take the time to jot down any questions you may have for your tax professionals.

Take Advantage of Retirement Planning Savings Options

Your retirement account can pull double duty by also being a handy tax tool. Selecting the right type of retirement account for you is a personal choice, but regardless of which type you use, max out the annual contribution if you can. This is among the easiest techniques for reducing your taxable income. Padding out your retirement account as much as possible only helps you more in the long term.

We often recommend self-directed accounts with Checkbook Control, like self-directed IRA LLCs and business trusts. But perhaps our favorite tool from a tax perspective is the Solo 401(k). Here are a few of the ways the Solo-K can give you an edge:

And that’s just the beginning. Learn more about the exclusive benefits of the Solo 401(k), or check out more details about our Solo 401(k). We even assist with compliance.

Royal Legal Solutions Can Help You

If you plan to implement new techniques or make changes to your tax planning, get help from a qualified professional. Our attorneys and CPA partners are familiar with real estate tax issues and happy to assist you. We can tackle everything from questions about the taxation of your real estate investments, to retirement account setup, and more. Reach out today to talk to our advisors and schedule your consultation.

Keep more of your money with a Royal Tax Review

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Three Ways to Properly Legally Protect Your Personal Residence

We talk all the time here on the Royal Legal Solutions blog about the importance of legally protecting your real estate investments.

Far less online material is devoted to the asset protection of personal residences. Those investors who are newer to asset protection may be wondering what, if anything, we can do for our homes.

I can hear some of the more seasoned investors shouting at their computers now: “But there’s the homestead exemption!” Great point. The reality is that your homestead exemption is only as good as the state you live in, meaning it’s not universally useful. It is also only one of the top four tools that you can use to defend your personal property.

Apply for a Home Equity Line of Credit (HELOC)

The HELOC is a relatively easy-to-obtain loan that is secured by the equity in your home. In other words, it’s a harmless type of debt. The application and qualification process is straightforward. Using a HELOC  is a tried-and-true tactic for making a residential asset unappealing to pursue in a lawsuit. Creditors, too, will often back off when they see the home’s equity is securing a debt. Fortunately for you, the property looks less attractive to creditors the moment any type of debt is associated with it.

Use a Qualified Personal Residence Trust

These estate planning tools are a lesser-known type of trust originally designed to minimize gift and estate taxes, though they also offer certain protections. The Qualified Personal Residence Trust works through provisions allowing an investor to continue occupying the home for a specified period of time, after which the residence will become the property of his or her heirs. This method has the added benefit of keeping the value of the home out of the taxable portion of your estate.

Get The Most Out of Your Homestead Exemption

Just because homestead exemptions are not all created equally does not mean they are worthless. There is no reason that you shouldn’t do what you can to maximize your homestead exemption. If you aren’t sure where to begin, consider checking with a qualified CPA that has real estate knowledge. That CPA may be aware of deductions and have other ideas for minimizing your taxes as well.

Concerned About Personal or Business Assets? Royal Legal Solutions Can Help

If you have concerns about protecting your personal or business assets from lawsuits, know that you don’t have to. The asset protection pros at Royal Legal Solutions are here to help you figure out the best plans for your needs, as we have for so many other investors around the country. Take a step towards more security by scheduling your personalized consultation now.

3 Key Tax Benefits of Using an LLC Structure

Limited Liability Companies have many useful properties for investors. Most of my clients approach me about forming Traditional LLCs or Series LLCs for asset protection, but often are completely unaware of the potential tax benefits their entity may provide. Today, let’s talk a bit about the tactics you can use to minimizing your tax liabilities. Specifically, we will be taking a closer look at the tax benefits of an LLC structure.

Tax Status Flexibility

One of the appealing tax benefits of LLCs is that you get to choose the manner in which it is taxed. But owners of Series LLCs don’t have to miss out on the fun. In fact, if you own a Series LLC, you can tax each Series differently if you desire. What exactly does that mean? Let’s take a closer look at how LLCs are taxed.

You may make your pick from any of the following three tax status elections when forming an LLC (or Series within a Series LLC):

Note that there is an exception to the flexibility norm. Single-member LLCs are more limited and may be forced to file as a sole proprietorship, then report income or losses on their personal returns. It is also important to be aware that the above are simply tax classifications rather than different types of entities. It can be easy to get the impression that an S-Corporation is an entity when indeed it is a tax status, as a C-Corporation is an entity.

Which tax option will be best for you? As with most answers in the financial realm, you’ll find that it depends on your individual circumstances, status, and ambitions in the real estate business. Only a qualified attorney and CPA should be trusted to give tax advice.

Deductions and Credits Galore For Those Willing to Look

If you’re serious about lowering your tax bill you know the power of deductions. So we recommend that you deduct, deduct, deduct everything that you can. No business expense is too small or inexpensive. See if you qualify for fuel deductions, and take a good written record of everything you really need for work and its cost. It may seem silly if you’re looking at many small receipts or expenses, but the old adage about how they tend to add up is true.

The fact that you may not be aware of deduction and credit opportunities is yet another good reason to have a solid CPA and attorney on your real estate dream team. These pros will often point out savings options you didn’t even know you were missing out on. So go forth and deduct shamelessly. It’s a win-win for both client and CPA.

Personal Assets May Be Leased to the LLC

If a valuable assets drag you into a higher tax bracket, an LLC offers a handysolution. You may be able to minimize this situation by leasing the asset to yourself (specifically, your LLC)  with a formal leasing agreement. Such arrangements lower taxable income and often allow for deductions.

For example, a home office is an item you lean on come Tax Season when you’re deduction hunting. Learn more details about the home office deduction and who can qualify from our previous educational resource on the subject. Home offices may not only be deducted from your taxes, but also leased back to your LLC.  When that leasing agreement goes through, you can write it off and claim it as a business expense. The fact that this type of business expense

Optimize Your LLC Tax Strategy With The Pros at Royal Legal Solutions

Between the asset protection and tax benefits, LLCs may begin to seem like a no-brainer. But to get the right entity that will do the best possible job for you, you may need Our crack team of attorneys and the CPAs we work with can assist you through any tax concerns you may have. As investors ourselves, we may have some more tips that you haven’t yet learned to exploit. Which ones will apply to you will depend on your personal circumstances.

If you are wondering how Royal Legal Solutions can help you save on your taxes,take our Tax Discovery Quiz. Our consultants are happy to explain your options to you, answer your questions, and when you’re ready, set up your personalized consultation. We look forward to helping you keep more of your income where it belongs: in your bank account.

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

Three Ways Your Taxes Are Impacted by Student Loans

Student loans are a major stressor for most Americans, with nearly 40 million managing this type of debt. Don’t let ignorance of how student loan payments affect your taxes add to your worries. In fact, there’s some good news for anyone making these payments below, where we examine three of the ways your taxes are impacted by student loans.

Deductions Are Available for Loan Interest Payments

If you pay student loans in a tax year, the interest on your payments may qualify you for a deduction of up to $2,500.  Your Modified Adjusted Gross Income will determine how much of the deduction you may take, with individuals earning under $80,000 and couples filing jointly earning under $165,000 receiving the full amount. You may still qualify for a lesser amount if your income exceeds these limits. Those who have paid over $600 will receive Tax Form 1098-E from their loan servicer; if your burden was lower, you may have to request it to get your deduction.

Filing Status May Influence Loan Payment Amounts

Many keep student loan payments manageable by taking advantage of income-driven repayment plans, which base payment amounts on actual income earned. Unfortunately, you can’t ignore that filing jointly with your spouse would likely change your income, possibly even disqualifying you from the plan you intended to use. Consider whether you’re better off filing separately if your joint income would substantially interfere with your ability to make your student loan payments.

Loan Forgiveness Influences Your Taxes

If you are using a loan forgiveness program, the type of program may influence additional taxes owed. For instance, if you are using the Public Service Loan Forgiveness Program, you must make the 120 on-time payments in the program’s criteria, but do not generally owe taxes on the amount forgiven by the program.

The same is not true if you are, on the other hand, using an income-based repayment plan. You may meet very similar criteria, but you’re highly likely to be taxed proportionately to the amount forgiven.

Tax Professionals Can Help You Make The Best of Your Situation

When in doubt, and particularly when the IRS is involved, get a professional opinion before making any major changes to the way you pay your taxes. A qualified tax professional can also help you determine where you can be saving substantially on your taxes and even point out deductions and credits you can take advantage of. At Royal Legal Solutions, our professionals construct your strategy with tax savings in mind, and we also have relationships with CPAs to assist us with complex tax situations.

If you have questions for our tax professionals, contact us today. We are happy to answer any questions you may have about our tax services or the tax implications of our other services. For specific advice on your situation, set up your personalized consultation today.

Tax Law and Family Court: What You Need to Know About Divorce, Custody, and Your Tax Obligations

Divorce is already one of the most stressful life events that many of us will go through. There’s a reason the expression is “going through a divorce”--it is truly a process to be endured. There are many factors to consider when you find yourself separating from your partner. On top of the emotional stress involved, you will also have legal and tax concerns to worry about. One concern is the fact that family courts often make rulings that directly conflict with federal tax law.

Technically, federal tax law trumps family court rulings. But in practice, this does not stop judges from making rulings that run counter to federal tax law and can spell trouble for the taxpayer. The errors in these rulings tend to arise out of ignorance. Family court judges may be accomplished experts in the practice of family law, but that does not mean they are also experts in federal tax law. The unfortunate result is that many judges inadvertently create tax problems for the divorcing couple. Further, if your family lawyer is not familiar with your potential tax issues, he or she may not be able to advocate for you as effectively. Fortunately, you can avoid the complications we will discuss by simply being aware of them and using the appropriate kind of professional help. Read on to learn some of the most significant tax issues you are likely to face in a divorce, and more importantly, what you can do to prevent the most common tax problems associated with divorce.

Dependency Issues: Which Parent Gets to Claim the Child as a Dependent?

One of the most common issues that a divorcing couple with children may face is who gets to claim any children as dependents on their federal tax returns. The parent who uses this exemption may be eligible for up to $4,000. Family court judges often mistakenly believe that both parents may claim a dependency exemption, particularly in cases where they are sharing custody. This simply is not true, and a person who blindly follows the court’s ruling may later find they owe the Taxman, despite having done “everything right” per the ruling.

Which parent has the right to claim dependency isn’t always clear-cut. Most courts will award the exemption to the custodial parent, or the parent who is providing over half of the child’s support and care. In joint custody cases, the determination of who is providing the majority of care will be made by the family court.

However, there is an exception to this general rule. The custodial parent may choose to release the exemption to the other parent by filling out IRS Form 8332 and submitting it with his or her tax return. Since all family situations are unique, this may be appropriate in yours. But be advised that if you elect to release the dependency exemption, you will not be able to claim the Child Tax Credit of up to $1,000 either.

Child Support Issues

Child payments may not be deducted or taxed, regardless of which party is awarded child support. The legal basis for federal tax law treating child support in this manner is interesting. The short version is that Uncle Sam does not want to incentivize or promote divorce in any way, and that allowing for any kind of potential tax break surrounding child support may do exactly that.

Alimony Issues

Alimony is a type of income and is therefore considered deductible for the party making payments. The payer may deduct however much alimony the payee is claiming as income on his or her tax return.

Some divorcing couples opt to use unallocated income as an alternative to alimony. This option is considered legally distinct from either child support or alimony, and may confer some additional benefits to both parties. First, contingencies may be placed on the support payments that are directly related the the costs of childcare and the circumstances of both parents and the child. For instance, unallocated income may end if your former spouse gets married, your child reaches a certain age, or in other scenarios. There may also be tax benefits for the divorcing couple, such as the recipient of unallocated income paying in a lower tax bracket for the support received.

Property Issues

A wide variety of property issues may affect your tax situation during the divorce process. Some concerns real estate investors would be wise to  advise their tax and legal professionals about may include the following:

If you anticipate any of the above property issues, one practical step you can take to make things easier is to make a complete list of any and all assets you own.

Other Tax Considerations in a Divorce

Many of the other issues to consider when divorcing are directly affected by which parent receives the dependency exemption. Examples of these issues include:

Avoid Tax Complications With Your Divorce By Getting a Professional’s Opinion

Fortunately, the issues discussed above can be prevented with a little bit of education and the help of competent tax professionals.

If you’re an investor preparing for a divorce, feel free to contact Royal Legal Solutions with questions you have about protecting your real estate assets during the process, avoiding tax issues, or any other concerns relating to your real estate investments. Our legal professionals are familiar with the tax laws affecting real estate, and we also maintain relationships with competent CPAs who can assist our investor-clients. We can also work with your family law attorney to ensure your needs will be advocated for properly in any divorce or custody proceedings. Whether your concerns are about taxes or other issues that require a sensitivity to the needs of real estate investors, Royal Legal Solutions can help you. Stay ahead of any potential legal issues by  scheduling your personalized consultation today.

Deciding How to File Taxes Once Married: Jointly or Separately?

You know that Frank Sinatra great “Love & Taxes?” Or those many romantic films that end with the couple riding off into the sunset, only to tumble into a large country bed with their tax returns? No? Us, neither. Fortunately for us all, the song “Love and Marriage” makes no reference to taxes and this part of married life tends to remain unscripted in film and TV. All the same, determining how to file is one important change you will have to address after getting married.

When does it make sense to file separately versus jointly? What factors do you need to take into consideration when determining how to file? We have created this cheat sheet to help you answer some of these basic questions and make the best decision for you and your spouse.

When Does The IRS Treat You as Married?

In general, the IRS will treat you as married for the tax year that you got married. So for the tax year 2018, it doesn’t matter if you got married on New Year’s Day or in December. You could have been married for a single day, even. But your marital status as of December 31, 2018 will determine whether the Taxman considers you single or married for the 2018 tax year--or any other.

When Filing Jointly Makes Sense

For most couples, filing taxes jointly once married makes sense. Couples who choose to do this will complete a single return together. Further, they must be aware that their combined income will be considered as a single unit. They must decide whether to itemize their deductions or take a standard deduction on this return. Fortunately, the IRS offers couples who file jointly one of the highest possible standard tax deductions. For tax year 2018, this standard deduction is $24,000--twice that offered to those who are married but filing separately.

Couples who file jointly are also eligible for certain tax credits that those who are filing separately may not receive. Examples of these credits include the following:

When only one spouse is earning money from a job or other income source, filing jointly makes more sense. This scenario makes it easier for the spouse’s combined income to fit into a lower joint tax bracket. The couple may also take advantage of the non-earning spouse’s deduction when filing their return.

Potential Problems With Filing Jointly

Filing jointly is not without its potential drawbacks. When couples file jointly, their overall income will be higher. This can potentially push higher-earning couples into an even higher tax bracket. Usually, it should not--the tax brackets for couples who file jointly are typically lower than if those same couples were to file separately. However, if two higher-income spouses file together, they may find their combined income is high enough to create problems. Such problems can include the following:

Another matter to consider is that when you file jointly with your spouse, you are liable not just for what you report, but for what he or she reports as well. By virtue of filing together, you are now “jointly and severally liable” for the tax payment itself, any interest due, and any penalties due as well. This can remain true even if you later divorce that spouse.

When Filing Separately Make Sense

While filing jointly makes sense most of the time, there are occasions where it makes more sense to file your taxes separately. After all, each couple’s tax situation is unique. Two key examples of when it makes more sense for spouses to file separately include:

The first situation is one where separately your liability from your partner’s has clear benefits. If your partner has been overstating income or knowingly making errors with deductions, you likely don’t want to be anywhere near that situation and this would be a good reason to file separately. The last thing you want is to get dragged in on a potential audit or tax dispute that you didn’t start. It may also be a good occasion to ask your partner some other pointed questions, but filing separately is at least a start.

There are a variety of scenarios that may meet the second criteria of one spouse being eligible for a substantial deduction that would mean the couple pays less overall by filing separately. Consider the following example. John and Mary are a couple in their late 60s. John’s income far exceeds Mary’s. He has continued to work his full-time job, while Mary has reduced to part-time hours awaiting retirement. Earlier this tax year, Mary had a major surgery earlier this year which cost approximately 20% of her personal adjusted gross income (AGI). Because of this fact, Mary could deduct the cost of her medical expenses if she and John opt of MFS status. If the two filed jointly, John’s income is so much larger that the medical expense would no longer meet the criteria for deduction: that it be larger than 10% of the AGI for the couple (if filing together) or Mary (if filing separately).

There are non-financial reasons why a couple may opt to file separately, as well. For instance, if one spouse is unable or unwilling to sign a return, or the couple is separated pending a divorce, filing separately may have some practical advantages.

Potential Problems With Married Filing Separately (MFS)

It is important to note that Married Filing Separately (MFS) is a different status altogether than filing as a single person. Partners who file separately must be aware of some limitations as well as potential drawbacks to filing in this manner.

First, spouses who are filing separately must either both take the general deduction of up to $12,000 (for tax year 2018) or both must itemize. One thing that is not permitted is for each spouse to do as he or she pleases--one cannot take the general deduction while the other itemizes. This “rule” is to prevent couples from making any substantial tax gains from simply filing separately. Similarly, the Internal Revenue Code also provides that taxpayers cannot “get around” the issues created by a higher income from filing jointly by filing separately.

Similarly, the couple who files separately waives their right to many of the deductions that couples who file jointly may take advantage of. For instance, couples who file separately must decide which spouse may lose the ability to deduct student loan interest altogether while capital loss deductions are limited to $ as opposed to the $13,000 couples filing jointly may deduct. The many kinds of tax credits listed above that are available for couples filing jointly would not be available to those filing separately. Social Security benefits are also affected. Couples who file jointly enjoy the fact that they are not taxed on their Social Security benefits until half of all benefits and other income received equals $32,000 or below. Every cent of Social Security income is taxed on a MFS return, however.

How Do I Know If Filing Separately or Jointly Is Best For My Situation?

There are two key things you can do when determining how to file your tax return. The first suggestion may sound like a bit of a headache, but it happens to be the only conclusive way you will know for sure whether your joint or separate return will in fact be cheaper. Prepare the return both ways, maximizing the benefits of each, then simply compare the costs. The other thing you can do, especially if going through the process of preparing your returns both ways is too time-consuming or demanding for your tastes, is get the opinion of a seasoned professional. A good tax professional can gather some basic information about both spouses and their incomes and generally tell which method will be best. He or she may also take the step of fully preparing both returns if the call is a close one.

Don’t Make Tax Decisions Alone: Get Help From Qualified Tax Professionals

As with all tax matters, it is wise to get the opinion of both an attorneys and  a CPA familiar with your situation before making major decisions. If you have read all of this information and still are uncertain about the best way to file, or simply want to learn more about what your options are for minimizing your tax liabilities, feel free to contact the experts at Royal Legal Solutions today. We are all too happy to see where we can help you keep more of your hard-earned capital in your pocket by developing strategies that take the full scope of your tax situation into account.

Royal Legal Solutions has attorneys who are familiar with tax law on staff, and we also maintain professional relationships with CPAs who are sensitive to the needs of the real estate investor. schedule your consultation today.

How Long Are Investors on the Hook for a Tax Assessment?

Most of us real estate investors know the importance of keeping the Taxman happy. But he has time to determine if he’s happy. With the prevalence of IRS-related scams, we feel it’s important that real estate investors know when IRS maneuvers are legitimate. Uncle Sam uses a little thing called the tax assessment period. This is the time the IRS has to determine if you have accurately reported and paid any taxes owed to them. For the vast majority of us, the general rule is that the IRS will have three years from the filing date to assess taxes.

Those Who File Taxes Early or Late

If you filed your taxes ahead of April 15 of the tax year in question, the IRS still has three years from April 15 of that tax year. Unfortunately, you don’t get a shorter period for being responsible.

If you filed late, whether due to your own issues or with the consent of the IRS through an extension, the IRS has three years from the date of actual filing to assess taxes.

Those Who File an Amended Tax Return

An amended return is a document you use to make corrections to your tax filings. So if you know you made an error on your tax return, you would use an amended return to rectify that mistake and make the appropriate payments. An amended return would not normally affect the assessment period unless it is filed rather late. If you file within 60 days of the end of the three-year period the IRS has to assess your taxes, they may extend your assessment period by 60 days.

Other Considerations

There are some other situations that can affect the outcome of your tax assessment:

If either of these situations applies to you, it may be best to contact a CPA or tax attorney.

What Happens if the IRS Determines You Owe Taxes?

If you end up on the losing end of a tax assessment, the IRS has ten years to collect the balance owed. It is best to pay this off in a timely manner, but of course, it is never a bad idea to reach out to a professional to be certain you do what you’re supposed to.

We wish you a stress-free tax season. Feel free to contact Royal Legal Solutions with questions about the tax treatment of your real estate investments or other tax questions pertaining to your investments. If you wish to build an asset protection plan that minimizes your tax liabilities, take our tax discovery quiz and schedule your personalized consultation today.

Scam Alert: How to Know if IRS Demands for Taxes Owed Are Legitimate Or Scams

Imagine you’re sitting in your office or at home going about your daily business, and you get a phone call. The caller informs you that you owe the IRS money. They go on to explain that your tax payment for the year before was never received at all and that you must pay up now or face serious consequences. You might be threatened with a wage garnishment or even jail.

Unfortunately, this is a real scenario that unscrupulous scammers use to trick honest taxpayers into paying money they never owed in the first place.  As you may have already guessed, the caller isn’t really from the IRS. They’re just a petty thief attempting a cheap, but an all-too-common con.

Ending up in a tax dispute is incredibly stressful. Of course, this is the fear that these opportunistic scammers will prey upon to fraudulently get their hands on your hard-earned money. Learn more about what these scams look like, alarm bells to watch out for, and most importantly, how to protect yourself from becoming a victim.

Four Warning Signs and Ways to Determine if IRS Scam Threats Are Real

First of all, don’t panic if you receive a call or email purporting to be from the IRS. Even if the threat is real, panic is not a strategy. Instead, follow these four tips to protect yourself from thieves posing as IRS personnel.

Verify The Source of The Communication

Make a note of the number that called you. A simple Google search can reveal if the number is in any way related to the IRS. If you received an email, look at the full address. If it does not end in “irs.gov” or at the very least, “.gov,” odds are good you are communicating with a scammer rather than a real representative of the IRS.

No matter what the caller says, you can simply hang up while you verify the origins of the call. You cannot be “punished” or forced to pay more money for hanging up on the caller, even if they really are with the Taxman.

Don’t Give in to Immediate Demands For Cash

While scammers will insist that you must pay past-due taxes immediately, our friends over at the real IRS will not. In a real tax dispute, you will receive a written demand for taxes owed in the mail.

Also, be aware that a real demand from the IRS will inform you of your rights in a tax dispute. Legitimate claims will always notify you of your right to appeal the amount in dispute. Even if you were found liable for taxes owed by the IRS, you would have options available to you such as payment plans.

Pay Attention to Payment Method Requests

Since the caller is demanding money, they will typically specify how it is to be paid. These requests can be clues that you are dealing with a charlatan.

One major warning sign is demand for payment in a particular format, such as with Western Union, money order, prepaid card, or even PayPal. Note that the real IRS will not even accept some of these forms of payment, nor would you be obligated to pay a large sum of money immediately over the phone or via an insecure email. Scammers will also play up the “urgency” of the situation in an effort to get you to reach for your wallet.

Demands for credit card payment are a dead give-away that the call is not related to a real tax dispute. Personnel from the IRS will never ask a taxpayer to give their debit or credit card information out over the phone. Even if you later find you do truly owe the IRS, there are plenty of other reasons to never pay your taxes with a credit card.

Watch Out For Outrageous Threats

Sometimes scammers will threaten to call the police or otherwise send law enforcement after you if you resist demands for payment. This is just another way to instill fear, cloud your judgment, and prevent you from assessing the situation rationally.

You cannot be arrested by state or local authorities for failure to pay taxes. Simply failing to file a  return or owing money to the IRS is not a crime, and therefore not a jailable offense. In theory, a person may be jailed for cheating on their taxes, but the IRS would have to prove that he or she did so deliberately. The burden of proof on the Government’s end is high, so even people who cheat on their taxes rarely end up seeing the inside of an 8x10 cell. Individuals who fail to pay the appropriate amount of taxes may be audited, have their wages garnished, or be subjected to a payment plan--but they will not be arrested.

What Can You Do About IRS Scams?

Even if you follow all of the above tips and find out that you really do owe money to the IRS, you still should not panic. There are several tools for fighting back if you end up in a legitimate tax dispute and even more for arranging payments.

If you do receive a call from a bogus tax collector, you can take action to help put the scammer out of business and spare future taxpayers from the types of calls or harassment you may have received.

First, you should consider reporting the scam attempt to the Treasury Inspector General for Tax Administration (TIGTA) online or by calling  1-800-366-4484. You may also file a complaint with the Federal Trade Commission. Mention in the complaint that you were contacted as part of an IRS Telephone Scam and include the details of the incident: dates, times, and any information that could help identify the scammer. Both of these authorities have the resources to notify the public about the details of these scams and pass on the information you have to the appropriate law enforcement agencies.

Bottom Line: Understand What IRS Scams Look Like to Avoid Becoming a Theft Victim

Now that you know these scams exist, you won’t become the next victim. That said, if you do have real concerns about paying your taxes, the best time to address them is before you file at all. Professionals like the experts at Royal Legal Solutions can help you with a variety of tax concerns. We routinely help investors set up structures that minimize their tax liabilities and work with CPAs who can assist you with other tax matters. Take our tax quiz and schedule a consultation to be proactive about your concerns and learn more about the services we can provide to help keep you on Uncle Sam’s good side.

How You Can Save Thousands in Taxes with an S-Corp

If you are an active real estate flipper or wholesaler, you are more than likely subject to the self-employment tax (15.3%). Read on to discover how you can save thousands on your tax bill by electing to be taxed as an S Corp.

A flipping or wholesaling business is not considered to be a passive activity like rental real estate. Instead, it is considered an active business. And because flipping and wholesaling are active businesses, you are subject to the full 15.3% self-employment tax which can lead up to an $18,130.50 $21,068.10 (updated for 2020) tax on your earnings, ouch!

You can definitely find a better use for that money, right?

How Can Being Taxed as an S-Corp Help?

Creating an S-Corp, or an LLC taxed as an S-Corp allows you to hire yourself as a W-2 employee and split your earnings between salary and distributions.

In this strategy, you only pay the 15.3% SE tax on the part of your income considered salary, and not on the distributions.

It is important to note that the wage or salary you pay yourself must be reasonable, otherwise the IRS might charge you back taxes and penalties (i.e. your wages can’t be $1 and dividends $99,999).

Example

You are a real estate flipper with earnings of $167,830 for the 2018 tax year. If you are simply a sole proprietor (or partner), then all of your flipping income is considered active, and up to $118,500 would be subject to the 15.3% SE tax – totaling $18,130.50.

However, if you set up an LLC and elect to be taxed as an S-Corp, you can split the earnings between salary and distributions. With the help of a CPA, you determine $65,000 to be a reasonable salary. This means you will only pay the SE tax on $65,000, saving $8,361.

Potential Pitfalls of this Tax Strategy

Of course, Uncle Sam wants his money, so it’s never that easy.

Service companies are more likely to be scrutinized by the IRS when using this strategy because most of their earnings come from personal efforts, and not from that of other employees. That is why it is imperative to work with a CPA to research and document the reasons behind the reasonable salary you decide to pay yourself.

Also, the IRS requires companies with W-2 employees to pay a Federal Unemployment Tax (FUTA) of 6.20% on the first $7,000 of income for each employee. In some states, you could also be subject to the State Unemployment Tax (SUTA). Once you implement this strategy, you will be considered a W-2 employee and will have to pay this tax.

There are also costs involved in creating the entity and filing a separate tax return if you’re not already a partnership. And for S Corps, there are some administrative requirements such as setting up a board of directors and holding meetings.

The Bottom Line with S-Corp Taxes

Creating an entity and having it taxed as an S Corp has its advantages and can potentially lower your tax liability, but may not be for everyone.

There are costs involved with setting up and maintaining the entity, which will have to be weighed against the actual tax savings you will receive. In many cases, this strategy will make sense for higher-income earners (people earning at least $50,000 from their business).

You will want to discuss the advantages and disadvantages of this strategy with your CPA to find out if this makes sense for you based on your personal circumstances. There are always unique circumstances, such as a husband-and-wife business (sole proprietor or partnership).

You may also be interested in our article, "How To Take Money Out Of Your S Corp."


About the author: Thomas Castelli, CPA is a Tax Strategist and real estate investor, who helps other real estate investors keep more of their hard-earned dollars in their pockets and out of the government's. You can find more articles from Thomas by visiting The Real Estate CPA’s website.

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

When to File Taxes Separately if a Married Real Estate Investor

Many married couples elect to file their taxes jointly because it is genuinely cheaper. Well, most of the time. If you're a real estate investor, you likely already know that the typical rules don't always apply to you. Filing jointly may end up costing you more depending on your situation and a variety of other factors. Let's look at three common situations where filing separately is typically cheaper for married real estate investors.

When Both Spouses Have High Incomes

Being a high earner is something most investors aspire to. But there are some drawbacks to both spouses being professionally successful. If you and your spouse are earning $309,900 or more annually, filing jointly could disqualify you from certain deductions that would otherwise save you money. This income level is not unusual if both spouses are real estate investors.
In these cases, it's best to work together by filing apart. You will each be eligible for more deductions by filing separately. You will still need to work as a team to ensure you aren't both itemizing the same deductions. But ultimately, taking the time to review your separate filings will preserve your collective wealth.

When Your Spouse Already Owes The IRS

If your spouse owes the IRS, filing together could cost you your refund. If you file jointly, the IRS will seize your refund to satisfy your spouse's debt. If you're relying on that refund for something essential like making a real estate investment, it is best to file separately until your spouse's tax issues are resolved.

When You're Getting a Divorce

If you are in the process of getting divorce or have a reason to suspect your spouse is dishonest when it comes to taxes, filing separately isn't cruel. It's the smart move. Even though you may want be to trust your spouse, if there is any love lost or trouble in paradise, filing separately will protect you. Liability attaches once you both sign and file the return. Essentially, you're treated as a unit for tax purposes. Divorcing partners have been known to shuffle around debt or attempt to hide assets. If you are experiencing any of these problems, filing on your own is actually a form of asset protection.

When in Doubt, Contact a Professional

If any of this information or the filing process is confusing, know that there are professionals here to help you save on your taxes, our tax attorneys Royal Legal Solutions can assist you with making the judgment call about filing jointly or separately. We work exclusively with real estate investors and know these issues well, and have assisted many married professionals in the past. When you work with us, you also have access to the CPAs we have personally vetted. Get professional help to avoid giving your hard-earned money to Uncle Sam.

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

Charitable contributions are a popular strategy among the wealthy for lowering tax payments. But this method isn't exclusively for the Michael Dells and Kim Kardashians of the world. Investors from all income levels, including you, can use it too. But even savvy investors don't always know that charitable gifts can be made from retirement accounts. So whether you simply want to donate money from your 401(k) to a cause close to your heart, save on your taxes, or both, this article is for you. Read on to learn more about your options for giving charitable gifts with your Self-Directed 401(k).

Why You Should Consider Giving Your Retirement Funds to Charity

The funds in IRAs and 401ks are among the most heavily taxed that the average investor will hold, and redirecting them towards charity can make a meaningful difference. Charitable donations help you save money by reducing your taxable income. This is why many highly wealthy individuals give in large quantities. Sure, many of them are philanthropic at heart, but there is also a distinct tax advantage to donating. The higher your taxable income, the greater your tax responsibilities when Uncle Sam comes around to collect his bills.
Giving to charity also qualifies you to receive a Charitable Gift Tax Credit. Literally anyone can take advantage of this. Generally, the credit is computed by taking the market value of an item or actual amount of cash donated, then subtracting the percentage of your tax bracket.
Strategic donations can lead to thousands returning to your pocket. Of course, there are limits: you cannot donate more than half of your income in a given year. Similarly, for these benefits to apply, you must itemize each donation.

What Options You Have For Giving to Charity

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

Which Options Are The Most Beneficial?

While any of these options is certainly beneficial and altruistic to the receiving organization, smart investors may be wondering which will benefit their own bottom lines. You may be surprised to learn that retirement and life insurance donations are among both your strongest and lesser-known gift choices.
Many potential donors do not know much about life insurance or retirement plan asset gifts simply because charities are less likely to request them. Many nonprofit organizations have a need for immediate cash that is simply not addressed with these types of donations. They are nonetheless useful for the charities--and you.

Ways to Give To Charity From Your 401(k)

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

Option 1: Donate Directly From the Plan

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

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

Naming the charity of your choosing as a beneficiary works the same way as designating any other beneficiary. However, this option has the added advantage of allowing plan funds to pass through to the charitable organization completely tax-free. If you have tax-deferred funds, this is actually the smarter expense than passing those same funds on to your heirs. Your heirs would have to pay the taxes, but the charity does not. Though this may not directly benefit you as much, it is certainly the most efficient use of money that would otherwise be gifted to the U.S. Government. That you can control the funds by selecting any qualifying charity means you have the luxury of supporting a cause you truly believe in.
 

Section 280A: Home Office Deduction Rules

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

Rule #1: You Must Have an Actual Home Office

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

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

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

Get Professional Help With Your Home Office Deductions

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

Double Your Real Estate Investment Return With a Tax-Efficient 401(k) Strategy

Did you know that you can use a self-directed IRA for your real estate investment? I’ve talked about this before and you can read more from our article about self-directed IRA investments.  There's no doubt that self-directed IRAs are powerful investment vehicles, but they aren't silver bullets for all investors.

That said, they do come in handy for Roth funds or when you’re planning to buy and hold onto one property for a long time. But the current IRS trends have many investors eyeballing different types of accounts.

So, what is an alternative I recommend?  I’m a big fan of the Qualified Retirement Plan (Solo 401(k) or Profit Sharing Plan) because it comes with the same benefits as a self-directed IRA and some more. Today, I’ll go over a strategy you can use to partner with your QRP to buy investment property.

House Flipping With a Solo 401(k): An Example

Fred Stark is a real estate investor who has spotted a hot property going for $200,000. He has a QRP with about $150,000 and $100,000 in the bank. Fred can easily buy the property in his own name or opt to partner with his QRP for the transaction.

How Do Investors Partner With a Retirement Plan?

To partner with his QRP, Fred is required to form an LLC. He then divides the ownership of the property in proportion to each member’s (Fred and the QRP) contribution. For example, if Fred puts in $70,000 and the QRP contributes $130,000, then ownership will be split in a 35% to 65% ratio between Fred and his QRP respectively.

How Profits Are Treated

Profits from an investment are usually distributed based on the percentage of ownership. This means that if the investment property Fred is buying generates an income of $30,000, he will receive $10,500 while $19,500 goes to his QRP. Consequently, John will have a taxable income of only $10,500. The $19,500 received via the QRP will not be taxable.

How Depreciation is Treated

Real estate depreciates over a period of between 27.5 years to 39 years. Fred can use the depreciation of the property to offset the income gains. So in fact, he can use this “paper loss” to his advantage.

What Impact Does Depreciation Have on Taxable Income?

Let’s have one more look at Fred’s $200,000 house. $175,000 is allocated to structures subject to depreciation while $25,000 is allocated to land. This means that the property will have a depreciation of $6,400 every year. Then his share of depreciation given that he owns 35% of the property is $2,240. This reduces his income to $4,760 from $7000. His QRP gets allocated $4,160. But since the QRP income is non-taxable, there is no benefit accruing from this depreciation.

But, wait: can he allocate the whole chunk of depreciation to his portion of income?

Yes. And this is where the magic happens. By using an LLC, Fred can allocate all the losses to himself, reaping the full benefit. Now his taxable income is only $600. Now his taxes are only $180 bringing his net income to a whopping $19,820 from the initial $20,000.

Set Up Your Solo 401(k) Today

If that’s not exciting, I don’t know what is.

The Solo 401(k) is a QRP that has amazing income and tax benefits that you should take advantage of. But you should proceed with caution. You may want to read our article on using a 401(k )to buy a house first. This is not a collaboration you should set up on your own.  Use a professional who has the qualifications and experience to execute it the right way.

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

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

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

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

1. Certified Public Accountant (CPA)

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

2. Enrolled Agent

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

3. Attorney

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

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

Bottom Line: The Pros Make Your Life Easier

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

Keep more of your money with a Royal Tax Review

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

Is a Land Trust a Disregarded Entity?

A land trust can provide anonymity and asset protection, but how are they treated for tax purposes?

It will depend on the type of trust you decide to form. Land trusts can be “simple, complex, or grantor trust[s] depending on the terms of the trust instrument.”

In this article we will explain the "disregarded entity," tell you what type of land trust is a disregarded entity, and explain other ways land trusts can be taxed.

What is a Disregarded Entity?

Before we jump right into what types of trusts are disregarded for tax purposes, let’s recap what disregarded entities are.

Disregarded Entities are “pass-through entities” that do not pay tax at the entity level, and do not file a tax return. Instead, you report the entity’s income and deductions are reported directly on your tax return (or whoever owns the trust).

This is good news is you don’t need to file an additional tax return for the trust, which of course would cost more money.

What Type of Land Trusts are Disregarded Entities?

For the most part, land trusts are structured as grantor trusts (also called revocable trusts), which are disregarded.

That is because you, the grantor of the trust, remain in control of the trust and its assets. You’re considered the owner of the trust for tax purposes.

This differs from an irrevocable land trust, where you give up all ownership rights of the trust and its assets. In this case the trust would be considered its own entity, and need its own tax return.

Series LLCs, Land Trusts, and Taxes

If your land trust is incorporated using a series LLC, its tax treatment will be determined by the tax treatment of the LLC.


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

Can Each Series in a Series LLC be Taxed Differently?

A series LLC is a limited liability company that allows you to create multiple entities under one “master LLC”. Each new entity is called a “child series” and can have separate membership interests, assets, operations – and treatment for tax purposes.

Series LLCs are popular among real estate investors because it’s easy to add additional series and they provide excellent asset protection. They also provide flexibility in tax treatment, as you will see

Protection For Real Estate Investors

One of the primary benefits of using a series LLC is you only have the file the articles of organization one time. To add another series all you need is an operating agreement.

This cuts down on the state fees required to open and maintain separate LLCs and reduces the administrative burden of managing multiple LLCs.

For these reasons, series LLCs are popular among real estate investors and business owners who own multiple properties with different partners and structures.

Series LLC Tax Treatment: One Example

You are a real estate investor and professional property manager. And often purchase over 10 properties a year with multiple different partners.

You open up a series LLC and use one as a property management company that is taxed as an S-Corp. Whenever you purchase a property with a partner, you create another series owned by you and that partner, and it’s taxed as a partnership. When you purchase a property yourself you simply have it taxed as a disregarded entity.

Using the series LLC helps you reduce the filing and administrative fees associated with opening and maintaining a new LLC each time you by a new rental property.

Tax Risks of Series LLCs For Real Estate Investors

There is some uncertainty around the federal tax treatment of series LLCs as there are no laws or official guidance provided by the IRS.

But unofficial guidance from the IRS and a Tax Court decision are available. And they indicate that, at least in certain situations, treating each “child series” as a separate entity with different tax elections is appropriate

The Bottom Line

Generally, LLC’s are not used primarily for their tax benefits, but rather their liability protection.
However, due to the ease of adding additional series, liability protection, and flexibility in the tax treatment of each individual series - series LLCs make sense for real estate investors who operate businesses and purchase real estate with different partners under multiple structures.
And since there is no official laws or guidance from the IRS, it is important to work with a qualified CPA and attorney to ensure you’re following all the rules and regulations to maintain the liability protection of each series.


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

Real Estate Flipping: LLC Taxation Issues To Know About

Are you an investor engaged in real estate flipping? Do you deal in tax liens or deeds or engage in investment activities in which you never hold on to property for longer than a year? 

You’re probably wondering what sort of entity I recommend for such transactions. If you guessed an LLC, you’re right. But it's not as simple as it sounds.

One of the issues flippers will struggle with is how these LLCs are taxed.   

Why?

This is an issue that can make or break your business. So you need to consider your needs as a whole to come up with the right entity for you.

Let's get down to the meat and bones of setting up the right entity for flipping properties.

Strategy 1: The Legal Beagle’s Take

Your attorney will, more often than not, focus on liability and how to avoid it. Most attorneys aren't savvy real estate investors themselves (although we at Royal Legal Solutions are). But an "average" lawyer will likely advise you to set up the LLC as a partnership for federal tax purposes.

But there’s a problem with this approach: You’re left exposed to the IRS. If they decide your real estate investment is actually an “active business,” you’re toast. You’ll be subject to self-employment tax. Even worse, this judgment about whether your investment is actually business is at the discretion of the Tax Court.

Strategy 2: In Comes The CPA

At this point, you’re probably thinking a CPA will solve all the problems you’re likely to face with the Taxman. After all, they’re the number cruncher.  

Your CPA may suggest that you can dodge the issue with Uncle Sam by setting up the LLC as an S-Corporation. The IRS treats S-corporations the same as partnerships. They’re both pass-through entities where income passes through to the 1040 of the owner. This way, his or her income is not subject to self-employment tax.

I’m sure you’ll agree this is a much better prospect. But we still have a problem.

On the surface, everything looks hunky-dory. But upon closer inspection, you will realize that the advice from the CPA only protects you if taxes were your only problem. Unfortunately, this is not the case with most real estate investors. You will need to raise money at some point.  

And here’s where both the lawyer’s and CPA’s approach will fail. When applying for a loan via a disregarded LLC or an S-Corporation, the bank will treat you as a high-risk borrower if you’re self-employed.

Strategy 3: The C-Corporation

Talk to someone with entity and tax chops (like us!), and they’ll know about this third alternative. It involves setting up a C-Corporation to handle your active real estate business while receiving your profits as W-2 income. This way, you won’t be considered self-employed or a business owner since your ownership is not part of your individual 1040.  

So ... What’s the Best Strategy For Real Estate Flipping?

There’s really no one-size-fits-all approach for flippers. Every investor has to pick what works best for their unique situation. Your choice will be based on whether you’re more concerned with funding your retirement, borrowing, or minimizing your taxes.

 

Interested in getting more details? Check out our article Selecting the Best Entity for Real Estate Flipping.

How a 401(k) Affects Real Estate Investors on Tax Day

You are probably already familiar with the benefits of a 401(k) for retirement planning. But did you know that using this type of account can also help you save on your taxes? In fact, there are multiple tax benefits to taking advantage of the 401(k). Read on to learn about some major ways to save on Tax Day.

401(k) Tax Credits

That's right: you can actually get a tax credit just for contributing to your 401(k). The Retirement Savings Contribution Tax Credit, also known as the Saver's Credit, is intended to ease tax burdens for workers with moderate or modest incomes. But if you meet the eligibility requirements, you can receive a credit up to $2,000. Married couples filing jointly may benefit even more, as their maximum credit is $4,000.

401(k) Contributions Can Lower Your Tax Bracket

Whether you are using a traditional 401(k) or the Solo 401(k), any pre-tax contributions you make are automatically going to lower your tax liability. How does this work? In simple terms, the contributed funds are being pulled from your paycheck before you even receive it. You're already receiving less on your paycheck, but this is actually an advantage when Tax Season comes. The IRS essentially acknowledges the loss you take from these withholdings. They're counting the money you actually receive, meaning your taxable income is lower. Thus, your tax obligations are also lower.
Smart investors in any tax bracket can take advantage of the rewards of making pre-tax contributions. Larger contributions lower your taxable income further. This means, if you contribute enough to the account, you can potentially lower your tax bracket--and enjoy massive savings on your taxes.

Roth 401(k)s Save You Money in The Long Run

There are many reasons to love a Roth 401(k). Roth retirement accounts in general come with many benefits, namely that contributions to the account are tax-free. Distributions won't be taxed when you take them, either. You can also take advantage of strategically timing your Roth contributions to relieve tax obligations.
Using a Roth 401(k) offers a multitude of exclusive benefits in both the short and long term. If you are having a low income year, are early on in your career, or expect to retire in a higher tax bracket than your current one, the Roth 401(k) is seriously worth considering. Check out our previous educational article to help determine if converting your 401(k) to a Roth plan is right for you.

Royal Legal Solutions Helps Our Clients Use 401(k)s to Save on Taxes

Retirement accounts can be intimidating, even for seasoned investors. Since we all must take accurate tax filing seriously to avoid penalties, savvy investors choose to get some help from the pros. The tax and retirement professionals at Royal Legal Solutions can help you get the most savings possible out of your 401(k). We offer a variety of retirement planning services to ensure you are using the correct types of accounts for your circumstances. And, of course, we can advise you on how to get the most tax benefits out of your retirement account.
 

Don't Pay Taxes With Your Credit Card

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

Using a Credit Card Will Cost You More

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

Paying Taxes With A Credit Card Damages Your Credit Score

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

Alternative Ways to Pay

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

Royal Legal Solutions Can Help You Manage Tax Issues

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

What Are The Tax Filing Requirements of a Partnership?

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

Filing Form 1065

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

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

Schedule K-1

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

Filing Deadlines

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

Related Issues & Tips

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

The Bottom Line

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


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