Tax Benefits of using an LLC in Real Estate Investing | Eric Freeman, Beach Fleischman

hey everybody it's ken mcelroy here we're here on real estate strategies and i'm here with my friend eric freeman hey eric hey ken happy to be here yes eric um eric's with beach fleshman and they are the company that does most of our tax returns so for those of you that know we have a lot of property a lot of self storage and office and and multi-family and land and new development et cetera et cetera et cetera and we meet with eric every quarter to go over our tax strategies and uh we do what what are right around 100 tax returns yeah that's about right so yeah so our company does about 100 tax returns every year and of course uh right before this i thank you for bringing a lot more tax returns out here today you're welcome i just wanted you to be tired when you're signing them so this is a great opportunity for you guys because um you know taxes are confusing even to ross and i i mean you know there's a lot of law changes and there's lots of things that happen and there's lots of things you can do legally to save on tax uh so the first question we're gonna uh talk to you guys about is you know around ownership ownership structures you know i know yeah there's a lot of confusion around this you know and so eric what do you feel is the best ownership structure for you know for the real estate investor what are what are some pros and cons yeah that's a great question so i mean there's a couple considerations uh first which are one what are your plans with investing in the real estate are you investing for buy and hold as a rental are you investing as a flip um are you a developer so there's all kinds of considerations um but i guess i'll tackle one of the most common which is a buy and hold type strategy maybe maybe not hold forever but how you hold for five years whatever it may be generally um you're going to want to use some kind of a legal entity not hold it in your name in your individual name and there's a couple of reasons for that one is more of a legal issue and trying to get as much protection as you can and then the second issue is dealing with whether you're investing with partners or whether you're investing alone so one of the most common structures is using limited liability companies [Music] you can if you're investing on your own uh generally using a limited liability company doesn't affect your your taxes so it's it's just kind of an easy um protector just put it in an llc and it's reported the same as if you owned it individually but you get that extra liability protection and so how does that work like let's say well first of all for those you guys may know i actually don't own anything in my name personal name every single thing i have is in some kind of an ownership structure for asset protection reasons but um you know here's what happens i i find a lot of times people go out they buy you know let's say they buy a duplex and you know it's 500 grand and it they buy it in their name you know they get the credit of their name they get the loan in their name and all that um what could they do at this point well as far as so most banks you're going to run into an issue when you're getting a conventional loan that they're not going to want to lend to an llc especially one that doesn't have a track record right so a lot of times you're you're kind of forced to to do it in your own name at first there are a lot of people after you get the initial loan and buy the house have or the duplex put in your name then maybe a year later you might transfer it to an llc that you own completely the bank may not necessarily like that because a lot of times they have what's called a do on sale clause in there which essentially says something to the effect of if you transfer the property we're going to call the loan due but generally that's not going to happen if you're if you're just transferring it to something that is still effectively you so by doing that you are in a way helping um get some asset protection but the loan is generally still going to be in your individual name right right so this is not about trying to transfer the the loan you know into an llc this is about asset protection but also you know let's say you call it abc investments you know now you can open up a bank account in abc investments right right and then the tenants write a check to abc investments and everything flows into this account it's called the eein number right the employee employee identification number yeah e-i-end employee employer identification number and um you know you have to give that to the bank they can open a bank account for you and then what you do is you have your tenants pay into that and you can pay all your expenses through there and then then all of a sudden now you have this tax return for this standalone entity right right yeah there's a lot of benefits to it one it comes off more professional the tenants two it's cleaner when you're reporting your taxes because now if when you go to get to the end of the year you've got a bank statement that has all your income all your expenses in one place you're not having to sort through whatever your various credit cards and whatnot it's just it's simplified and at the end of the day as important as taxes are also knowing what your your net amount is is number one yeah i tell you it just makes things a lot more simple you know if you guys think about it like we all have a lot going on you know we have cars and we have our own homes and we go on vacations and you know there's all these things that we do and dinners and things like that if you can just put all the stuff in a separate llc in a separate bank account run all your expenses and all your income through it then you have a very clean accounting too right right everything runs through there the tax returns clean and um you know it just makes a lot of things a lot easier especially at the end of the year when you're trying to sort through all those papers yeah like it can be you know and then then you actually what happens is if you're ever audited you know it's even harder to prove right right exactly so that's why these uh you know these entities are really really important so you talked about the llc let's talk about the s corp and the corporation because those we used to do s-corps right i've done some corporations but there's very different ramifications on tax right exactly so let's talk about those yeah so generally speaking you're not going to use a c corporation for real estate now it depends what you're what you're doing but most the time you don't want to hold any real property in there and the major reason is one it's difficult to get it in and out without paying tax so say you want to transfer the ownership you want to change it five years from now or you want to add a partner or something like that it's very difficult with a c corp without some kind of tax ramification the second reason is income generated from a c corporation does not get any type of preferential rates so a lot of times when you sell real property you're not paying at the same rate that you would your income from your job at an ordinary rate you get what's called a capital gains rate when you sell but a c corporation does not have capital gains rates you're still paying at an ordinary rate and then the third reason why you don't want to do it is because you end up paying double tax so you not only pay tax at the c corporation for any income generated but then when you take dollars out you also pay what's called a dividend tax again so your tax rate is much higher you have less flexibility so generally you're not going to use a c corporation to hold real estate an s corporation is similar in terms of you don't want to hold the real estate generally it's more used as kind of a an ancillary type entity maybe you want to use it there's benefits to use it if you grow and you want to use it as a management type company there are certain benefits you can get from that in terms of reducing self-employment tax things like that getting fringe benefits which is basically just paying getting reimbursements for your car and auto that you're you're using health insurance things like that so you're not actually holding real estate in it but it's ancillary to your business and then of course there's other types of there's other benefits that are probably get a little more complex when you start developing as corpse can have there so how does somebody decide like you know like it it it can be daunting i know when we first came to you guys i don't know 10 plus years ago you know you you actually unwound a lot of our llcs and s-corps and and put them into different things based on you know uh different legal things we could do inside of those in fact i think we even have some c-corps um i don't really understand all the reasons but i know that it you know but you do it's uh like so what what could people do what should they do you know because like you know we ross and i just moved blindly and they bought stuff you know the attorneys tell you kind of what to do but then you know it's interesting there's a very different conversation with them with an attorney than an accountant right and i found like i'll tell you one thing that happened to i sold a business once and my attorney negotiated it awesome you know but then i ended up paying a lot of money in tax and then at the end of the year i brought it to my tax guy sorry it wasn't you at that time and he's like hey if you would have done it this way i could have saved you 50 grand on tax i'm like are you kidding me so so what you guys need to know is that you know there's you know whatever what your attorney says might is not necessarily the best thing from a tax standpoint right you actually need to have advice from both right that's exactly right i can't even tell you how many times that exact situation has happened i think it's really important one educate yourself on the basics just so you understand the language from a legal and a tax perspective you don't need to know everything that's not your job um but definitely talk to both and advance and get ideas because what's good for one is not good for the other all the time yeah yeah yeah so now i know not all tax accountants are created equal right so how does somebody navigate through that i get a lot you know i've referred you a bunch of business over the years and and you know people come to me and they say who do you use and and uh you know but but you know there's a lot of people that just do books you know and so what are some of the questions people could ask you know to in order to find out whether or not you know they have they're getting the right advice because i found a lot of time on one of the properties i bought if you remember we bought that property up in sedona the seller had a horrible tax accountant and he had a like a two million dollar tax liability if he was going to sell the property so we had we went and restructured his tax um and his ownership structure so they didn't have any tax on the sale uh i did it for the seller you know because i wanted to buy the property right and this this happens a lot right i mean i bet you see a lot what are some of the things that people can ask or do to make sure that they're getting good um a good firm well i think i think number one is someone that you get along with really well because ideally you want to be able to reach out to them when you've got a transaction happening and you want them to to be able to give you the time to guide you through it so i think that's number one they can have all the knowledge in the world but if they're not there to help you that's true guys we're on the phone with eric i bet you there's not a week that goes by there's not an email or a conversation with you right right that's easily almost every week so that's number one i think and then number two is if you know it's really difficult if if all you've got is a job there's not a lot you can do in the tax world but once you start owning real estate having a business there's just tons of options so if you're going in and you want to kind of lay down what your situation is and if you're getting ideas back that's a good start you don't want someone that's just saying yeah you know right give me your stuff and you know and here's your return and you know don't forget to you know put a stamp on it right exactly right no i've been there you know it's it's interesting like you you're always pushing back and saying the word depends that's your favorite part about this depends which is like a really long conversation but but that's what you want yeah you know that's actually what i want you know i you know i'm always plowing forward and so is ross but then you always kind of bring it to a tax um you know level which is really really really important if you guys are buying or developing or selling because there's ways to do it you know that legally that you can mitigate tax right right and i think you bring up a good point because that also reminds me why i say depends is because even though there are standards of how you generally do things in the tax world just like everything else everyone's situation is different so it's a good sign if whoever you're working with is not just telling you what to do but they're actually asking you things like what are your plans with this investment do you do you have a time frame what do you want to do with it who are your partners what's your goal basically what are your goals and then from there you can determine what the best plan of action is for your specific situation if they're just telling you this this this then they're in you know the mode of just cranking out the same thing every day right right so right what you what you know the reason why we love eric and beach is because you basically challenge us you know wha what are we doing this quarter you know you know our what are you buying what are you selling what are you refinancing what has a cost on it or cost segregation you know what are we doing for depreciation what capital expenses are we you know you know should we be doing and we're all trying to mitigate tax and so at the end of the year which might surprise you guys we'll sit down with eric and he's already combed through all of our all of our deals and he's like i need you to spend money on these properties right right all the time like this this is a i mean who doesn't want to hear that but he's like i need you to i need you to buy new fitness equipment or buy a new golf cart or buy a maintenance card or do this because um you know there's all these reasons that you can take the losses so we might have a lot of pr we might have a lot of gains that we're trying to offset and you can do it you know if you're upgrading and continually doing things to the property so so if you guys are managing this through the year then you know come march or june or july you know these things should be in motion because you have to spend all the dollars in the year right right generally speaking right so um and i'll just add that a lot of times all the things that we're saying you should spend money on are things that you want to spend money on anyway in the business it's all it's about more timing so buying new fitness equipment or golf cart or upgrading the units with counter tops whatever it is that you end up doing hopefully are things that are increasing the value of the property or increasing your income it's not that we're just saying spend money all right right so i actually had a tenant because i'd do some rental properties on the side and he came to me a potential tenant and and i was asking him about his business and everything and he was doing some kind of martial arts on the side and he goes well i'm i'm looking to rent because i want to do this on the side and you know generate some expenses to reduce my taxes and i'm just looking at like wait so your plan your tax planning strategy is to spend all your money yeah well there's a lot of people that think that way you know they use they they're quick to say oh you can write that off i'm like what what does that even you don't even know what that means so i think what you brought up a really really good point so you know all of our properties require capital deeds and you know we have capital strategies and hopefully you do too on the roofs on the parking lots on the you know on the interiors and you know on things that we're doing and so if you can um if you're planning on doing something the next year and you can do it you know one year earlier you know these are things that you can do to reduce tax right right exactly yeah and so that's what we're talking about here and and you know obviously if you can renovate or upgrade your place you're gonna probably get a little bit more rent hopefully you know if it's certainly on the interior so it all makes sense yeah and it's good to know a little bit in advance this is one of those times where it's it's worthwhile maybe talking to your tax advisor first on what items you can actually expense that year versus items that are what we call capital expenditures so there's a difference between items that you can just write off in the year that you spend the dollars versus items that are more long term in nature so if you're doing a major major remodel of some sort then sometimes those items have to be capitalized and what we call depreciated which means you take a deduction over many years as determined by the irs so it's good to know in advance if you're expecting this deduction well well is it one that i can actually deduct this year or am i going to have to wait to get this deduction right right very very good point so so one last thing so we've talked about llc an s corp and a c corp why would anyone ever use a c corp you know because it always gets this bad rap for double tax right you know um can you just walk through that a lot of times so in specific to the real estate business it's one of those things that may be what i call an ancillary type entity so you're generally not owning real estate to it but maybe maybe you're paying wages from it something like that so that can be one of the benefits if you have enough income and you're you're getting management fees maybe you're managing your own property maybe you're managing other people's property there's a certain way to use escorts or c-corps to pay your wages and reduce things like self-employment or take other types of expenditures so you're generally not trying to create income necessarily within the c corp but it's a way to pull out wages so not like the martial arts guy right exactly exactly all right eric hey thank you again this is great uh hopefully you guys enjoyed that so make sure if you guys are setting up an ownership structure one you need to do it for asset protection um but also uh contact your tax uh consultant and and find out exactly what eddie you should be using so thanks again

Channel: Ken McElroy

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Keywords: Rich Dad, Entrepreneurship, Investing, Personal Development, Get Wealthy, Earn Wealth, Ken McElroy, Entrepreneur, Rich Dad Advisor, Success, Business, Self-Help, Coaching, Real Estate, Real Estate Entrepreneur, Real Estate Investing, Freedom, Lifestyle Business, Hustle, rich dad poor dad, tax strategist, legal structures, business structure, tax strategies 2020, real estate investing 2020, learn real estate, tax, tax value, tax advantages of llc, tax advantages

Id: 40HZhvcCPo4

Length: 19min 21sec (1161 seconds)

Published: Thu Aug 27 2020