Four Reasons You Don t Want to Put Real Estate Inside an S Corporation
Four Reasons You Don t Want to Put Real Estate Inside an S Corporation
Rental property owners sometimes consider using S corporations to hold their investments And at first look, this idea sort of seems promising S corporations are very popular with non-real-estate small businesses And one hears all the time about all the tax savings that the S corporation delivers . .Sadly, while many people do hold real estate through an S corporation, an S corporation doesn’t make sense for a handful of practical reasons: . .No Benefit to Using S Corporation . .The first reason you shouldn’t put real estate inside an S corporation? Simple S corporations don’t deliver special or extra tax benefits to real estate investors . .Income and deductions within an S corporation retain their character as they pass through the S corporation and flow onto the S corporation owner’s tax return Accordingly, an S corporation doesn’t let you avoid the passive loss limitation rules (which often trip up real estate investors) And the S corporation doesn’t increase the number of tax deductions you get . .Note: If you’re concerned about limiting your legal liability, you don’t need to use an S corporation You can use a limited liability company . .Forces an Extra, More Complicated tax return . .One thing putting real estate inside an S corporation does do? A real estate investment S corporation automatically forces you to do an extra, more complicated tax return . .Here’s why I say this: A real estate investment that you personally own or that you own through an LLC can be handled on a simple schedule E form that’s part of your regular 1040 tax return . .Unfortunately, if you own the exact same investment inside an S corporation, you’ll need to file a full-blown S corporation tax return The S corporation tax return will annually cost you at least several hundred dollars–and maybe even a bit more Yikes . .May Trigger More Complicated Accounting . .You what else happens when you put real estate inside an S corporation? You will, as a practical matter, need to step up to a real double-entry bookkeeping system like Microsoft’s Office Accounting program or Intuit’s QuickBooks program Why? Because when you do your S corporation tax return, you’ll need to include not just statements of income and deductions in your return You’ll also need to include balance sheets at the start and at the end of the year . .Checkbook programs like Quicken will produce statements of income and deductions No problem But you’ll probably need to buy, learn and then use a full-fledged small business accounting system to produce good balance sheets if you’re doing your real estate investing inside an S corporation . .Note: To be nit-picky, balance sheets are not required components of a corporate tax return until the corporate revenues or assets exceed $250,000 In some areas of the country, accordingly, a small real estate investor might be able to own one or more properties and not tip over this threshold In many parts of the country, however, a single property will cost more than $250,000 and, therefore, will mean balance sheets are required if the investment is stored inside an S corporation . .Limits Your Depreciation Write-offs . .A real estate investment S corporation will also often limit your depreciation write-offs Why this occurs is a little tricky to understand But in a nutshell, when individuals and partnerships borrow money to purchase the real estate, they may be able claim tax write-offs for depreciation on the owner tax returns . .Note: There are rules which limit these so-called passive losses But if you can trick your way around the passive loss limitation rules–and maybe people can–you can use the depreciation as a tax deduction on your personal return . .So here’s the problem with an S corporation: You can’t get tax deductions for things the S corporation borrows money for If the S corporation purchases the real estate using a mortgage, for example, the S corporation’s shareholders probably won’t be able claim the depreciation loss . .The reason for this is that you don’t get credit (or what tax laws call “basis”) for loans other people make to the S corporation You only get credit (basis) for money you invest in the S corporation or money you lend And you need basis to claim the deduction . .Note: S corporations and their shareholders can use back-to-back loans to get basis With back-to-back loans, the mortgage company first loans to the shareholder and then, second, the shareholder loans to the S corporation Then the S corporation purchases the property using the money borrowed from the S corporation owner or owners This approach, which often works with non-real estate loans, usually doesn’t work with mortgages The bank wants to have a first-row security interest in the property .
Source: www.rsstnx.com
Get Your Real Estate License and Help Buyers Benefit From 8K Tax Credit
In an effort to further stimulate the housing market and address economic challenges in our country, the United States Congress has passed legislation that provides a tax credit of up to $8,000 for people purchasing their first home Now here’s where you come in - get your online real estate license with Allied Real Estate School and spread the good news for first-time home buyers! . .To qualify for the 2009 First-Time Buyer Tax Credit, which is sure to help many people make the dream of home ownership a reality, your client must purchase the home sometime between January 1, 2009 and December 1, 2009 In addition, the buyer or his/her spouse may not have owned a residence for at least three years prior to buying the home . .While the maximum amount of tax credit given to those who qualify is $8,000, there are two main factors involved in determining the total for each buyer: the price of the home and the annual income of the purchaser While the credit will be equivalent to 10% of the purchase price of the home, up to $8,000, single buyers who make $75,000 or less, as well as married couples who earn up to $150,000, are eligible to receive the most credit . .If a buyer’s income surpasses these limits, but does not exceed the maximum, they may still qualify The credit amount decreases for single buyers who bring in between $75,000 and $95,000, and for buyers filing jointly who gross between $150,000 and $170,000 per year (Those with incomes that exceed $95,000 for singles and $170,000 for couples are not eligible for the tax credit ) . .Buyers who occupy the home for a period of at least three years are not required to repay the tax credit and, since it is fully reimbursable, can get their credit returned to them in the form of a payment . .With the recent announcement of the eagerly anticipated guidance from the U S Department of Housing and Urban Development (HUD), there is even more positive news for first-time buyers FHA-approved lenders have been given the okay to begin the development of bridge-loan products which will make it feasible to use the benefits of the federal tax credit upfront Home buyers can use these loans to help cover closing costs, buy down their interest rate, or put down more than the minimum 3 5 percent . .Many potential first time home buyers are unaware these programs exist Obtain your real estate salesperson license, educate first time buyers and transform them from renters to proud home owners - a dream they may have never thought possible Allied Real Estate School can help with100% online real estate courses that fit your unique schedule Start today, because you deserve more than a job - but a rewarding career that makes a difference in the lives of people you help .
Source: www.rsstnx.com
Avoid Foreclosure With a Short Sale
So you’re caught up in the wave of foreclosures like a lot of other people? It’s now becoming the new Negative Status Symbol Know that you are not alone, it is a tough place to be and unfortunately it may get worse before it gets better There is a stigma that goes along with losing something, especially when it’s your home Also, the financial mess it creates can stick with you for years to come Unfortunately there are not a lot of solutions; regardless of what you hear in the media and from your lender So it’s a bitter pill to swallow, and in order to succeed you have to get quality information & move forward quickly with your decision . .You may be considering a Short Sale to relieve you of your problem? Short Sales are a good solution, but you need to know what to expect . .1 Short Sales usually take a long time . .This is a double edge sword, because on the one hand you get many weeks, or more likely many months of free rent while waiting, but the roller coaster ride can be agonizing And you won’t know for certain if it will succeed or just be a lot closer to foreclosure, until you near the end of the process . .2 Avoiding foreclosure is really the only benefit you should expect . .Don’t expect to receive proceeds from the sale Most lenders (with the exception of FHA insured) don’t want the owner to receive any benefit at all In fact lenders stipulate that the seller/owner must not receive any proceeds from the sale of the property, as one of the agreements to doing a short sale . .3 Hopefully the person working on your short sale really knows what they are doing . .Realtors are still getting up to speed on how to do a Short Sale Some know how to do them, but most do not (not effectively anyway) Realtors are not usually ecstatic about doing them either It takes roughly 6 times the amount of work compared to selling a regular property Whoever does the negotiating needs to keep consistent pressure on the lender to work on the file and get it done In my experience this is where negotiators fall down on the job They are not proactive in their pursuit of pushing the file along to get a payoff approval . .4 What is the basic anatomy of doing a short sale? . .The property should first be listed for sale to find a buyer Once a buyer is found and an offer is made, all the necessary paperwork from the owner; which pretty much includes all the information that was provided to get the loan in the first place, must then be submitted in the right order, and in the right way to the lender Submitting it the right way can mean the difference of it ending up on top of the stack, or the bottom Once an offer is submitted the bank will call for a BPO Once the BPO is done, you then find out if the buyers offer was within their guidelines and will be accepted Assuming it is, the bank will then issue the payoff approval good for 30 to 45 days They will usually give extensions if it is needed to close, but never rely on that . .5 What is a BPO and why should you care? . .A BPO is a “Brokers Price Opinion ” Usually done by a local real estate agent The bank orders the BPO which is basically a comparison of the value to other properties, in order to gauge whether the offer made by the buyer will be accepted, rejected, or countered Whoever you have doing your short sale, they must understand how to effectively set up a fair and accurate BPO It is a must for the banks BPO agent to be met at the property with your realtors BPO report and knowledge of the property (yes your real estate agent can do their own BPO too) The whole objective is to influence the value of the property down, in order to insure that the bank will take the least price possible Because values are always subjective anyway, do not leave this important key of the whole short sale process to chance If you get nothing else out of this article, know that the BPO IS the Key difference between selling your property or not . .6 There are three main financial issues that are worth knowing about . .* Property taxes usually become delinquent, because when you don’t have enough money to pay your mortgage, then the property taxes are most likely not getting paid either In order for escrow to close, the property taxes must be paid These will most likely be paid by the bank or indirectly by the buyer, and be included as part of the short sale payoff . .* Income taxes are based on what’s called the phantom income from the sale of a property For instance if you originally bought your property for $300,000 and this was the amount of the loan (100% financing for this example), say the loan was paid down to 290,000 then if the home lost value and was sold via short sale for $150,000, you could be taxed on the $140,000 cancelled debt ($290,000 - $150,000) Even though you lost the house too This is a very simple example because you have to take into account your personal situation in regards to other income and expenses in other areas of your life Special note: there are many ways to lower or completely extinguish the tax burden if you do a short sale, or end up getting foreclosed on The Mortgage Forgiveness Debt Relief Act (H R 4638) of 2007 provides relief from debt forgiveness taxation for certain owner occupants now until December 31, 2012 This is specifically for Owner Occupied properties (limit of 2 million dollars) If it is an investment property there are other alternatives available, one being insolvency (if your debts are more than your assets), there may be other options too Get a good tax professional or CPA, they are worth their weight in Gold Do not let someone talk you out of a short sale simply because it will be better off to let the property go to foreclosure, this is not the case Note: We are NOT giving you tax advice, because we are NOT tax advisors . .* Deficiency judgments’ can be requested by the lender for accepting a short payoff (or when a foreclosure takes place too) More and more lenders are insisting on an agreement or promissory note by the owner to pay a portion of what was originally owed, usually over a number of years, and usually at no interest This requested deficiency is usually calculated from the 2nd mortgage, at about 10% to 40% of that value If it would be a hardship to pay back, and you are planning on doing bankruptcy anyway, then you could simply agree to the installment which would subsequently be wiped out by the bankruptcy Or if your plans do not include bankruptcy then maybe the short sale along with this payment, would still be better than the alternative .
Source: www.rsstnx.com
June 25 2009 04:48 am | Real Estate
