It's been awhile since I've written in this blog. Sorry about that. I vow to do better for the rest of the year. Here is a great question from Bryan that is critical to anyone who is investing in real estate or otherwise doing business in real estate.

Q: Can you explain the difference between a real estate dealer and a real estate investor as per the IRS's perspectives? I've heard that you have to be careful in how you set up your companies and purchase real estate properties because you might lose some tax treatment, etc. Please advise. Thanks!

A: You are correct that this is a most important issue. There are two consequences to being considered a dealer of real estate. First, the gain on the sale of the real estate is taxed as ordinary income, not as capital gain. This is important even if you hold the property less than a year, as short term capital gains can be offset by capital losses from stock and other investments whereas ordinary income cannot.

Second, a dealer's income is subject to Self-employment tax. This is an additional 15.3% tax ON TOP OF your income tax.

The IRS looks at your intent to determine whether you are a dealer or an investor. If you INTEND to hold the property for a long time, you are an investor, whether or not you actually hold the property for a long time. For example, suppose you purchase a property and fix it up with the intent of leasing it. While you are fixing it up, a neighbor drops by, sees what a great job you are doing, and offers to buy the house. Your intent was to hold the property for a long time, so the IRS will allow you to treat the gain as capital gain.

The key is to do those things that show intent to be an investor. Here are some things that would show that intent:

1. You have a history of buying and holding properties for a long time
2. You don't do anything to market the property for at least a year
3. You rent the property out and hold it as a rental
4. You don't sell properties very often (similar, though slightly different than #1 above)

The people who get in trouble here are the flippers. They fix up a property and promptly begin marketing it for sale. They are dealers according to the courts and the IRS. It doesn't even matter how many they fix and flip during the year. Because their intent was to flip the property, they are dealers and have ordinary income.

If you are a flipper, there are still ways to reduce or eliminate your Self-employment tax and lower your income tax. Contact us at cs@provisionwealth.com to learn more.

Warmest regards,

Tom

Here is an interesting question from one of our students. I'll do my best to answer it with the information I have. That said, it's always best in a complicated situation like this to sit down directly with a tax advisor and go over the complete set of facts and circumstances with your advisor so you can get a more complete and comprehensive answer.

Q: Hello Tom, I am in the process of closing a rather large deal, and my commission with be 6-8 figures maybe more. I do have 2 LLC’s and was wondering how much of a Red Flag would be raised to Home Land security if I first had it brought directly into my business account here in the US? Secondly since it is and LLC “C” corp. what will be my tax ramifications if I did this all at once? All monies were legally earned, and not earned through drug sale, money laundering or anything what so ever that is illegal.

A: First, I'm glad to hear you aren't doing anything illegal. You can always receive income into a U.S. company from whatever source without raising any flags so long as it is not cash you are depositing and you report everything properly to the IRS on your tax returns.

Your tax effect will be a very large tax at the C corp level and then a second tax when you take it out as a dividend. This is why I don't like C corp's as the entity to use for a primary business. I much prefer to see your primary business taxed as either a partnership or an S corporation so you don't have a double tax issue.

For more on this, go to http://www.provisionwealth.com/products and click on the school of tax strategy. Go into the product, "Making the Most of My C Corp." Then, call our office at 866,467.5809 to make an appointment with one of my partners who can help you determine the absolute best way to handle this transaction.

Warmest regards,

Tom

Craig has an interesting situation where his employer has offered to pay for his housing. Oh that we all had this challenge, eh? (I'm learning to be Canadian. I told my Canadian friends when I was in Edmonton last weekend that I would learn how to say "eh". They told me it would be okay if I learned this, so I'm practicing.)

Here is Craig's question:

Q: Hi Tom I currently employed and I received a W-2 and I have another business and received a 1099. I am looking to buy a house. My employer has offered to pay for my mortgage as part of my employment benefits. Could this interfere with my personal tax, could I roll my business and employment into the same business structure because I am a horse trainer, and my business and employment are the same? Thanks Craig

A: Unless your housing and where your house is located is a condition of your employment, you will be reporting income for the amount of the mortgage payments made by your employer. No big deal, really. Perhaps instead they should simply increase your salary by the amount of the mortgage payment.

The only way you could roll your employment into your business is if you were not a W-2 employee and instead receive a 1099 for the entire amount of compensation. Then, you could do it.

You are in a situtation that calls for a comprehensive tax strategy. Please sit down with a tax advisor to review your situation. If you would like our help, please call 866.467.5809 and ask for Gennifer.

Thanks.

Tom

A lot of people are getting into partnership these days to do fix and flip or other real estate projects. Typically, one will provide the funds and the other will provide the time. I like this type of arrangement, since it maximizes the resources of both parties. The key here, is that there is a partnership, regardless of what else you may want to call it. You may call it a loan or you may call it a joint venture. From a tax standpoint, it's still a partnership and should be treated that way. Here is a specific question from one of our School of Tax Strategy members, Bojan.

Q: have a partner that is buying property, it will be on his name and he will pay for it. Together we will do rehab and split cost of rehab, profit from sale of property we will share. How he should pay me my portion of profit and is he will be responsible for taxes from full profit and can we split that expence and how. Thank you

A: You have a partnership. And probably a general partnership at that. You should create a set of accounting records for the partnership, do a tax return for the partnership and set up an entity for the partnership. Garrett Sutton and I teach a course on this for Rich Dad Education. You may want to sign up for it. Garrett is an attorney and teaches the asset protection part of the course while I teach the tax side.

Warmest regards,

Tom