Looking for Owners of Investment Properties (Vanity Post -- not a sales pitch!)

Alberta's Child | 7/8/03 | Self

[Alberta's Child]

Over the last few months I've come across several opportunities to purchase some real estate for investment purposes (both for current income as well as potential long-term gains). I'm looking for some advice from Freepers who have done this themselves, particularly with regard to the tax advantages of either owning the property personally or creating a company (sole proprietorship or corporation) to own them.

The tax question has become an issue primarily with the long-term possibility, since I've already started doing some leg work for potential partners and would like to start deducting these expenses as soon as possible.

Any help would be appreciated.

And thanks to FreeRepublic for giving me an outlet here!

[Ff--150]

bttt

[Support Free Republic]

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[billhilly]

Here is my situation and I hope it will be useful to you as you contemplate what to do. I live in Northern Virginia and also have a house in Kill Devil Hills, North Carolina. The house in NC is rented and has been for several years. In order to get the full tax advantage of the second home, we will have to live in the rental house for at least two years, then there will be no capital gains tax. Living at the beach (The Outer Bankis) will not be hard to take, but we will have to sell here to realize the tax relief. Fortunately, we are older and could move most anytime.

New Jersey has a lot of seashore and you may want to retire there one day. It is a smart move since seashore rentals are practically guaranteed to pay your mortage.

[Rodney King]

You have freepmail.

[billhilly]

It will pay your mortgage also.

[Alberta's Child]

OK. Thanks for the info. The property in question for me is a small office building, so none of the laws governing the capital gains tax on a first home would apply. I assume that you are doing all of this on your personal tax return and not as a corporation, right?

[gubamyster]

I'm looking for some advice from Freepers who have done this themselves, particularly with regard to the tax advantages of either owning the property personally or creating a company (sole proprietorship or corporation) to own them.

There would be no difference between owning the property personally or as a sole proprietorship. They are treated the same for tax purposes and you would be held personally liable in both cases. You would report the income/expenses on your Sched E and would be taxed on your personal return. Depending upon your tax situation - if you are in an Alternative Minimum Tax (AMT) situation - you may not be able to take full advantage of all your losses, as they would be reduced by the AMT.

If you are in AMT you may consider forming an S-Corp. That way the corp can own the rentals and you would be able to take advantage of all the expenses. The income/loss would flow through to your personal return and avoid the double taxation situation of a regular C-corp. The S-corp (as well as a C-corp) would also provide you limited liability, not realized by the sole proprietorship.

The tax question has become an issue primarily with the long-term possibility, since I've already started doing some leg work for potential partners and would like to start deducting these expenses as soon as possible.

If you went ahead with the investment you could take the “leg work” expenses as start-up costs, and depending upon how much they are, you may get by with expensing them all in the first year, or possibly may need to amortize them. However if you do not go ahead with the business, then it depends upon how aggressive you want to be in taking these expenses as “investment” expenses on your personal return.

[Atlas Sneezed]

Don't even think about buying property unprotected by a corporation without consulting a good corporate attorney. Do you really want to lose your house and retirement fund if someone gets injured in your rental?

And don't rule out incorporating in a different state.

[HamiltonJay]

There is little difference if you hold an investment property in your name or a company or corporation from a general tax perspective.

Regardless of entity that owns the property you get the same deductions (depreciation etc) against the income that it generates.

Capital Gains I do not believe have any difference, nor does entity holding it have any effect in my mind on your ability to 1031 exchange.

Corporate holding generally does give you a little better position in terms of personal protection should something go wrong or you get sued related to something with the property as well as if the property is held by a corporation any judgements against you personally cannot become attached to the property and vice versa, no lien or judgement against the corporation can be tied to your personal property.

Trust are also a good entity for asset protection in this manner as well.

Best of luck.

[balrog666]

I have only one area to advise you on here. Have a written agreement on buyouts between the partners before you form the partnership or corporation. Specify what to do if someone wants to sell out (or dies) and how the price will be determined. You may even want a mutual insurance policy which will buy out any deceased partners. Doing this up front will save you a lot of time and agravation later.

[chriscraft]

I would suggest a single member Limited Liability Company. You receive superior security over a personal ownership as well as the normal benefits accruing to real estate ownership. LLC's are also a more acceptable entity for the purposes of refinancing and exchanging in the future.

[Alberta's Child]

Thanks for all your input. There are other angles to this that may come into play over time (I may use part of the office myself at some point in the near future, I may end up doing a little business and/or owning properties outside the U.S., etc.), and I'll be consulting with a good financial advisor soon.

The AMT angle was one I hadn't even considered -- this is something I need to look into.

One thing I've already started doing is keeping good records for tax purposes, so I can start deducting these exenses for this tax year.

[gubamyster]

One thing I've already started doing is keeping good records for tax purposes, so I can start deducting these exenses for this tax year.

This is probably the most important first step (speaking as a CPA). Get yourself a copy of QuickBooks or at least Quicken for Home & Business. If you start a corp it is important to have good books including a balance sheet & income statement.