Protect your business by learning how to set up your taxes for real estate investing. This video will show you several key factors to keep in mind and helps you keep all of your profits protected.
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How To Set Up Taxes For Real Estate Investing
Joe: Hey, it’s Joe Crump. The question here is, “Joe, how do I set up my taxes for my real estate investing business?” I’m not a CPA, so I can’t give that kind of advice. But I can tell you what I do, and how I’ve set up my own business and structured my own business. One of the things is, you want to look at both taxes and asset protection. Those are the two things that you have to keep in mind when you’re trying to structure your business. Your asset protection is really important because if you get sued, somebody hurts themselves on one of your properties and the liability insurance that you have on that property doesn’t cover it, and I’ve never had that situation happen. I’ve never had anybody sue me because of getting hurt on my properties – knock on wood. Hopefully, that’ll never happen.
Joe: But, I always have sort of the fear in the back of my mind that if that did happen, maybe the insurance company would find a way to weasel of making a payment. So, if they did that, there’s the potential that they could take that asset from me. And if they take that asset they could take any asset that’s in that particular LLC, that LLC that owns that property. So, you have to make sure that your properties are divided up amongst different LLCs. So I have multiple LLCs. And you don’t want to put more than the amount that you’re willing to lose in a particular LLC. So, divide up your assets in a way so that you don’t have all your eggs in one basket. Now, that’s just plain asset protection.
Joe: Now, as far as taxes go, does it make sense to have an LLC when you’re flipping properties using the For Rent Method, or just going in and doing deals and making money and in and out of the deals, does that make sense? And it may not at the beginning if you’re just getting started. My CPA told me that it probably doesn’t help you with your taxes until you’re making about $75,000 a year. Doesn’t take that long to get to that point, but as soon as you make about $75,000 a year, then you can actually save money on your taxes by having an LLC for your properties. So, you might not want to worry about setting up an LLC at the beginning and instead on your 1040’s, your personal returns, there’s a Schedule C. And you can fill out a Schedule C and if you’re using TurboTax or you’ve got a CPA, they can do that work for you and you can put all your expenses for your business on your Schedule C and deduct that from your income which will reduce your taxable income.
Joe: But, the big problem with the Schedule C is that you’re more likely to get audited. So, they typically go after small businesses, self-employed people like that more often than they go after LLCs. The percentage is very small with LLCs. I’ve never been audited, none of my LLCs have ever been audited, whereas when I was working as a Schedule C I was audited twice. That was many years ago. I was also in the film industry at the time, so they were targeting film industry. But I also know quite a few investors. It’s a good business for the IRS to target.
Joe: It’s a lot easier for them to go after the small mom ‘n’ pop houses like us than it is to go after Jeff Bezos, or Bill Gates. They’re not going to go after those guys because they’re so well protected. And they have a lot more, even though there’s a lot more they could get from them, we’re the easy pickings. So, they’re going to come after us instead, and they’re going to come after the Schedule C first, then they’re going to come after the LLC small businessman.
Joe: But so far, I haven’t been audited – knock on wood that that continues. And it’s no fun when it happens. But I was audited twice with a Schedule C. It wasn’t the end of the world. I did get a CPA to represent me. It cost me some money to do that, but he also saved me, well, he was able to go into the audit and practically wipe out what they were asking for. Because I was trying to do it right. And we ended up being able to argue that the deductions that I took were legitimate.
Joe: So, you want to try to make sure you understand a little bit about taxes and what’s deductible and what’s not deductible so that you don’t get yourself into trouble. You also want to be very careful about not intermingling your funds. So, if you’ve got three LLCs, don’t use the money from this LLC to cover these costs. Make sure you keep those things separate. You can one LLC loan money to the other one, but make sure you book it properly. And then send that money over and then spend the money out of that other LLC. So, you can set your business up that way.
Joe: The biggest thing about taxes that I would suggest is that you set up a self-directed Roth IRA. A Roth IRA is an amazing structure. You can’t pull your money out of it until you’re 59 1/2, so if you’re really young it’s going to be a while before you can pull that money out. And what I did, I’m now past that age. I’m now 60 years old so I’m able to pull that money out if I want to. But what I did for years was we’d have outside investments, outside the Roth and inside the Roth. So, we’d have investments both ways. One that I could pull money against right now, and the other is money that I can’t touch. And that saved that money for my retirement and helped me build that portfolio. And the beauty of the Roth is it’s an after-tax IRA which means that you have to pay taxes on any money that you put into the Roth before you put it in. So, if I made $10,000 and I was in a 40% tax bracket. I’d pay my $4,000 in taxes and I’d invest the $6,000 that was left into the Roth. Now, I can take that money that’s in the Roth and I can invest it in real estate.
Joe: So, let’s say I buy a property subject to and I put $1,000 into that property to fix it up, or put new carpet in it and I keep that property. That property then can grow and then maybe within a ten-year period it’s doubled in value now. Instead of $100,000 it’s worth $200,000. I’ve made $100,000 on that $1,000 investment that I put into my Roth. So, even though I paid taxes on that money before I put it into it, I made $100,000 in profit on that particular property. And I can do that 6 times if I had $6,000 that I put into that Roth.
Joe: If you had a regular IRA that was a before-tax IRA, where you don’t pay any tax on that $10,000 and you put it into the IRA, that’s a regular IRA, you could put the whole $10,000 in instead of only the $6,000 because it’s before-tax money. But, when I finally retire and pull that money out, then I have to pay taxes on the income that I’ve got.
Joe: So, my tax burden is going to be much, much higher – especially if I’m only putting a few thousand dollars in to start that Roth IRA, which is all you really need. You don’t need to put much money into that Roth IRA to make that happen.
Joe: There’s also some really interesting things that you can do with partnering with other people with your Roth where you can partner with people that have money if you don’t have much money and you wanted to bring in someone, an investor, you can do that inside another LLC.
Joe: The other thing I like about these self-directed IRAs is you can set it up through something like Pensco, or Equity Trust. Pensco just changed its name – I’ve forgotten the name that they’re using right now – but once you set up, you can then invest in an LLC that is outside of the Roth. You can set up an LLC, invest in that LLC, create that LLC and it’s 100% owned by you. And use that as your main LLC that can then distribute money. And you can set up a bank account and have control of your bank account. Because a lot of people don’t like Roth IRAs because you have to go through the accommodator, the Pensco or Equity Trust to get your money and you have to fill out all the paperwork with them and it slows everything down. You don’t need to do that if you set up an LLC and then fund the LLC through Pensco.
Joe: Then all that money can come into that account. And then you can put it back into Pensco if you want, or you can leave it in that LLC. Doesn’t matter, or you can use it to invest in other properties by putting it back into Pensco and then taking it and buying other LLCs. Or, if you’re doing it like I am, you buy one LLC that’s owned by Pensco and then out of that LLC, that’s the holding LLC, it doesn’t own any property, doesn’t hold any property at all. What it owns is other LLCs that own property. So, those LLCs underneath it own multiple properties depending on my risk tolerance for each of those LLCs.
Joe: So, that’s how you’d handle that. Now, if you’re just flipping properties, you might also want to think about an S Corporation. S Corporation is for high income earners. So, once you’ve gotten to the point where you’re making $75,000, $100,000 and you’re doing it just with flips and you’re not keeping those properties, all you’re doing is assignment flips, then it might make sense to do an S corporation. I also have my software company in a corporation like that and I have my coaching program in a corporation like that. So, that’s the way that I can keep everything safe and separated, so if somebody comes after one of my businesses or one of my properties they’re not going to be able to wipe me out.
Joe: One of the problems I had back in 1991 when I lost everything is because everything was in one place. So, when I lost one thing I lost everything. And I never wanted that to happen again and it made me relatively paranoid about that happening again. So, I’ve been very careful about setting up the process this way.
Joe: And if you ever want to learn how to do this, if you’re in my mentor program, I’d be happy to help you set up your business and show you the different ways that you can do it. Of course you’ll want to have the advice of an attorney to help you go through this process, but at least I can show you how I’ve done it.
Joe: It took me, the most of what I learned about how I did this, didn’t come from attorneys. It came from other investors who did it and had to figure it out and you keep asking questions of their attorneys until they figured out the best way to do it. Also, if you’re going to be using an IRA, a Roth IRA, you’re going to need to have a CPA who understands Roth IRAs for real estate investors.
Joe: There’s a lot of them that understand it for stocks, but they don’t have clients that have real estate. So find somebody who’s a CPA that you trust that maybe owns their own property and maybe has their own Roth IRA. So that’s important in this process as well.
Joe: Lots of ins and outs to taxes. Of course, basic tax law, you want to learn all that stuff. Again, I’m not a CPA, can’t give that kind of legal advice. But at least you have a pretty good idea of the kind of thing that I do for my business.
Joe: All right. Subscribe to the video channel. Got to JoeCrumpBlog.com and sign up for my free newsletter. I send out a lot of information that’s free that you can’t get anywhere else. Also check out my mentor program ZeroDownInvesting.com. It’s a six-month program where I take you by the hand and walk you through that process and teach you how to be an investor.
Joe: All right. Hope that helps.