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REAL ESTATE Should i open corporation to buy real estate

newtothis

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Jan 28, 2008
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How are you,

I and my friend are in a process of buying residential properties 3 families mainly.
And as far as I know at the end of the year when I do tax return we can write off 25K as expanses for buildings and it doesn’t matter how many do I have.

Some one told me that if I open a corporation, and buy real estate under that name I can write off more? Is that true?

Also for instance if we ever decided to close or cant maintain them anymore and go bankrupt we will not be personally liable for the loses, Is that true ?

If anyone has any suggestions or know anything about it I really appreciate it. Because we are in the process now and trying to figure out the right way.

Thank you
 

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newtothis

New Contributor
Jan 28, 2008
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Thank you.

it gives me some info, but i was looking for some info, maybe for someone who is familiar with that or had experienced or have done the same thing.
Some one told me C corp. is the best, but i want to know exactly why.


thank you
 

bflbob

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And as far as I know at the end of the year when I do tax return we can write off 25K as expanses for buildings and it doesn’t matter how many do I have.
Plenty of confusion here.

First, you can't write-off expenses for buildings.
You can depreciate buildings, and write-off that depreciation.
And, you can write-off the costs of maintaining and renting them.

So, if you buy a 3-family for $100,000 you'll get to depreciate about (1/27th) $3,600 of it.
Many people think you can write-off $25,000 of the house, but that's not true.

On top of that, you'll get to write-off the interest, assuming you borrowed for it.
Let's say that's about $6,000 for the year.
Add in repairs, taxes, insurance, etc.

So, now you're at (maybe) $15,000 in "write-offs".
But, you rented the place for $1,000 per month, or $12,000 for the year.
So, your net write-off is only $3,000.

Of course, you can get to $25,000 by overspending or under-renting.
But you might as well sell $10 bills for $5 if that's the case.

Some one told me that if I open a corporation, and buy real estate under that name I can write off more? Is that true?
Still more confusion.

While the Corporation might be able to write-off more, you'll write-off less.
I'm assuming you're talking a C-Corp, which more or less "stands on it's own".

Think of the situation I've outlined above...the $3,000 write-off, and let's assume you have other personal earnings of $50,000.

If you ran it thru a corporation, it (the corporation) would be able to write-off $3,000 against earnings of $0...
...so it would owe no tax.
You, as an individual, would NOT have access to that $3,000 loss, so you'd be taxed on the full $50,000.

If you ran the property thru an LLC, the $3,000 loss would pass to you, and you'd only be taxed on $47,000.

Also for instance if we ever decided to close or cant maintain them anymore and go bankrupt we will not be personally liable for the loses, Is that true ?
This is probably the biggest misunderstanding in business.
Most people assume that when they run stuff thru an LLC, Corp, or Limited Partnership, that they won't be personally liable.
In most cases, it just isn't true.

I have an LLC for my rentals.
When I got a Lowes Card, I had to personally guarantee payment.
When I got a mortgage, I had to personally guarantee payment.
When I got a Bank of America Card, I had to personally guarantee payment.
When I set up a Line-of-Credit, I had to personally guarantee payment.

An LLC or Corporation protects you (somewhat) from lawsuits.
But even then, you can be found "Personally Liable" if you did, or permitted, something dumb.
Dumb, like not shoveling snow -- or leaving a can of gas next to the furnace.

If anyone has any suggestions or know anything about it I really appreciate it. Because we are in the process now and trying to figure out the right way.
To start out, I'd read every thread in the Real Estate forums on this forum.
Then I'd read the Classic Posts forum over on www.richdad.com .

Real Estate really isn't that tough, but it sounds like you've been given some very poor advice so far.
If I were you, I'd make sure I understood the entire process clearly before sticking my money in.
You don't need to be an expert, but you can't go in without knowing the basics well.
 
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newtothis

New Contributor
Jan 28, 2008
57
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Thank you for all info.

And I am sorry I am so stupid about it.

Let’s take this example for example:

Let’s say we buy 3 family for 300k and rent them out and will have positive cash flow.
Then we buy another one, and another one. So lets say now we have 5, 3 family houses that bring us some positive cash flow.

We are not planning to do anything else, just mainly buy and rent them out, and then if price is right maybe sell one.

So from that perspective, what is the best way for us to handle that. Should we set up any sort of corporation or no.

We are looking for best solution to save on taxes or just to structure the real estate business.

Thank you
 

JScott

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Spread your holdings between 2 or 3 LLC's for best protection.
Agreed...though I would go even further and say that you should hold each property in a separate LLC. Don't hold more than one per LLC, or you risk multiple properties if there is a suit against any single business entity.
 

Yankees338

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Jul 24, 2007
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Agreed...though I would go even further and say that you should hold each property in a separate LLC. Don't hold more than one per LLC, or you risk multiple properties if there is a suit against any single business entity.
Sorry to hijack the thread, but just outta curiosity, has anybody here ever actually been sued over an incident at a property?
 

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bflbob

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Sorry to hijack the thread, but just outta curiosity, has anybody here ever actually been sued over an incident at a property?
I never have been, but the company I work for has -- several times.
We're pretty big -- about 1,000 units of senior housing -- so that probably doesn't help.
Falls, thefts, sexual harrassment, even a rape once.

Of course, we have pretty good insurance too.

Steve Olafson can probably tell you.
As you grow, you become a target.
 

Yankees338

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Jul 24, 2007
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I never have been, but the company I work for has -- several times.
We're pretty big -- about 1,000 units of senior housing -- so that probably doesn't help.
Falls, thefts, sexual harrassment, even a rape once.

Of course, we have pretty good insurance too.

Steve Olafson can probably tell you.
As you grow, you become a target.
Thanks. I'm sure SteveO has some stories, as always!
 

bflbob

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Agreed...though I would go even further and say that you should hold each property in a separate LLC. Don't hold more than one per LLC, or you risk multiple properties if there is a suit against any single business entity.
I somewhat agree with you, especially if the properties are more expensive.
But having an LLC for each property gets expensive in some states.
I believe California is about $800 per LLC per year.

If you're in LA or Napa, and own a $1,000,000 property, it makes sense.
But I bought my 5-unit for under $100,000.
I can buy a 3-family here for as little as $35,000 (junky).

The risk-reward ratio tells me to put a few into each LLC in that case.

A better way is to have the 'sued' property make good profits.
The good profits pass to the 'sewer' (<--intentional:smash:), who gets taxed on them.
But you, as the managing member of the LLC can choose not to distribute cashflow.
The 'sewer' gets hit with the taxes, but no cash to pay them with (kind of stinks to be a 'sewer'.)
Then, after a couple of years, have a sister LLC offer to by the rights to the charging order...for pennies on the dollar.

Not too bad, huh?:smxG:
 
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newtothis

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Jan 28, 2008
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ok. Under individual LLC, would i have more tax advantages or any other advantage then just buying them under my name ?

can some one use real examples to show the difference?

And there any benefit to have it just under my name.

thank you
 

JScott

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ok. Under individual LLC, would i have more tax advantages or any other advantage then just buying them under my name ?

can some one use real examples to show the difference?

And there any benefit to have it just under my name.

thank you
I don't believe there are any tax advantages between LLC and holding under your name. If you are the sole owner of the property, the major advantage of an LLC to hold the asset is protection against liability that could claim both your property and your personal assets.
 

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