Passive Real Estate Investing… Best STRUCTURE? (250K Tax Facts!)
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Passive Real Estate Investing… Best STRUCTURE? (250K Tax Facts!)


– Hi, Clint Coons here. And in this video, we’re going to discuss asset protection for the
passive real estate investor. All right. Let’s get started. (upbeat rock music) Okay, if you’re a passive
real estate investor, that means that you’re buying
properties to hold long-term and you wanna collect the rental income from those properties. I get it. That’s a great way to invest. In fact, I’m an avid passive
real estate investor. I used to flip properties
for a couple years. Then I realized that the money is made in collecting those checks
every month at the mailbox. Well, if you’re gonna be a
passive real estate investor, there’s a number of
different options you have. But the number one
options that I like to use really depends on the type of income that you’re currently making. And then from there we can determine what is the best structure for you. So I’m gonna break this down into two different income levels: those of you who make
less than $250,000 a year of adjusted gross income
and those that make more. So if you’re on the less
than 250, what you should do is create a Limited Liability Company. If you watched one of my other videos where I discussed about
the importance of anonymity in creating your
structure, watch the video on the very first LLC you
should create if you’re gonna be a real estate investor. This would be your Wyoming
Limited Liability Company. Let’s assume that you’re buying single-family homes and we’re not dealing
with commercial here. So you’ve got your Wyoming LLC, that would be the very
first LLC you create. Then you’re going to create
LLCs that are set up to hold your various real estate investments. And all of them will be owned,
all of these LLCs up here will be owned, by that Wyoming
Limited Liability Company. And then you’re gonna be down here and you’re gonna own this Wyoming LLC. Now, if you’re making
under $250,000 a year, then with this LLC, which
really important is choosing the proper tax status for. See, an LLC is a hybrid entity. So you can choose to have a
tax as a C corp, an S corp, a partnership, or a disregarded entity. Now, depending on what you
plan to do going forward, that is, if you intend
to work with lenders and you wanna continue
to grow your portfolio so you’ll be obtaining additional loans, then I would suggest that
you set this LLC to be taxed as a partnership. I’ll just use P for that. You’re gonna use partnership. The reason why I’m going to
recommend partnership tax status is that in a partnership,
it’s going to give you a K-1. So this entity will file a tax return. Now, why do I want it
to file a tax return? Well, it comes down to how I
want people to perceive me. Sophisticated real estate investors, they invest though Limited
Liability Companies, limited partnerships and
on their tax returns, their 1040s, which of course
is what the underwriter’s going to ask for when
you apply for a loan. They’re gonna look at your 1040
and they’re gonna see a K-1 from an LLC. So that LLC, of course,
owns various properties is what they’re gonna notice on that K-1. So the message you’re
sending to the underwriter, “Hey, I look like those
sophisticated investors “who invest in LLCs
treated as partnerships “or limited partnerships.” So the whole concept here is
that I want the underwriters to think that I am a
real estate professional, that I have the experience
the knowledge and know-how to go out and invest in real estate. Now, of course you do because
you’ve taken trainings on it, or you’ve been doing it, but the fact of the matter
is that I wanna convey that with how I prepare my returns. Because the alternate approach, which is if you don’t plan
to buy any more property is you can have this entity
set up as a disregarded entity. I’ll just put D on there. And so if it’s a disregarded entity, then you’re not gonna
have to file a tax return because all of your income
and loss and the properties are all gonna flow down
onto your 1040 and show up on page one of your Schedule E. So the real distinction here
is what do you plan to do with your business going forward? So if you wanna continue to grow and you’re gonna work
with additional lenders, then I would suggest you have
this taxed as a partnership so it files a K-1. That comes onto your 1040, not on page one of your Schedule E, page two. And it tells the underwriter,
“Hey, I’m a sophisticated “real estate investor and
I’ve set up my structures “like other sophisticated
real estate investors do.” Again, painting the image
I want them to understand. If you’re not going down that road and you’re not looking to borrow money, then just keep it as a disregarded. Let ’em all flow onto your 1040. It doesn’t matter because
you’re not going to be working with anyone where that may be important. Now, I did say that if you
make more than $250,000 a year, you may wanna look at a slightly different tax structure for this. So if you’re making over 250,000, then one of your concerns is going to be the Net Investment Income
Tax that we have or NIIT tax. And the way you can help minimize that tax on your rental income is
to set up this Wyoming LLC. Same structure, but you don’t
wanna tax as a partnership, you don’t wanna tax as
a disregarded entity. I would look at S corp tax status. Again, that’s gonna file a tax return; it’s gonna give you a K-1, but it’s also going to
help reduce your taxes on your rental income. So you’re gonna get a few
things here if you’re making over $250,000 a year. Now, if you’re wondering why
don’t I just tell everyone to set it up as an S corp, because there is a significant drawback to this tax election. And that has to do with the S corp itself. When you make that S corp
tax election on your LLC, if you have properties up here
and you wanna pull them out, well, if you take them out, then that will be a taxable event at the LLC’s tax bracket, which flows down to you, which
actually is taxable to you. So that can be a concern. You just can’t move appreciated
assets out of an S corp without getting hit with a tax. So once you set it up, these properties are
gonna be locked in there. Now, why would you ever
wanna move ones out? I’m not sure. Maybe you wanna give a property
over to one of your kids and you wanna bifurcate it off, well, that will be an issue for you. You’d have to sell it. So you’re giving up a little when you make over $250,000 a year to go with the S corporation tax status, but you’re gonna save on taxes. (soft upbeat music) Hey, if you like what you’re seeing here on my YouTube channel
and you wanna go deeper, and you wanna learn more, just to let you know, we teach three-day Asset
Protection workshops all over the country. In these workshops, we go really
deep into all these topics and show you how to set this up. And more importantly, we
meet with everyone one-on-one to help them design a plan. This is your opportunity. If you’re interested in
attending one of our workshops, go right into the show notes now and you can see a link
there where you can register for one of my upcoming three-day Tax and Asset Protection Workshop
for Real Estate Investors. So those some things that I
would look at when it comes to setting up my Limited Liability Company for my passive real estate investments. You’re gonna use LLCs, you’re
not gonna need corporations. Go with this type of
structure here, but what’s key is how you choose the tax
status, or this holding LLC. (cheerful music)

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