Merry 🎅❄️🎁⛄🎄 Christmas, real estate investors!
Here is your gift from me to you, the Part 2 I promised you from last week.
Everybody likes cash for the holidays, and my gift to you is worth thousands of dollars.
Ho ho ho!
So, where I left off last week…I was getting to the juicy part with all the money savings through this strategy:
Form One Master Entity
Whether solo or with partners, form an LLC or corporation in your state. This is quite easy to do, if you know how to type (your state’s name) Secretary of State Business into Google.
You can do it yourself, without an outside registered agent, if you’re good with filling out forms.
Many people form an LLC for each property they purchase because of advice obtained through one source or another, and I think that’s a good idea for a couple of reasons.
I also want to caution, however, that depending on where you live that can get expensive.
My home state of Colorado only charges $50 to organize a limited liability company, making that very affordable, but we have clients in other states where it’s over $100.
And it’s $800 in California, with a franchise tax of $800 each subsequent year. Sorry, Californians, your home state makes it kind of expensive to be in business.
Wherever you may be, I consider this to be a sound strategy for those properties you intend to lease to tenants, because legal attachments remain solely within that property, in the event you end up with an unhappy renter. The LLC protects all of your other assets plus your personal life, and isolates your legal liability to the one property alone.
All of this is background to the main point I want to make, which is whether you take the risk of owning a number of properties without LLC protection or with, you most definitely should form one “master business” entity.
Your sub-LLCs are assignable under the name of your master entity. This is in fact preferable.
Don’t get too hung up on the name of your new master entity – you don’t want the subject noun to be super-specific. Something like “enterprises,” “holdings,” or even just calling it something without a subject name at all gives you the flexibility to operate diverse but similar operations under the big umbrella.
I like compound word names for a unique flavor, personally. Like, if you and your husband’s name are Joseph and Mary Bethlehem do something like “JoeMarBeth Enterprises.” Easy, right? Maybe not my most creative moment, but it illustrates the point.
I am advising you that you can run ALL of your passive real estate investment, and “dealer” activities, under this new LLC. You can even incorporate if you really want to, but an LLC works just fine for this.
Now, are you ready for the really juicy part?
Elect S Corporation tax status with the IRS
Whether or not you chose to become either an LLC or a corporation within the jurisdiction of your home state, you are eligible from the date of organization or incorporation to be treated as an S Corporation for tax purposes by the IRS.
In fact, you can do it without any difficulty with what I refer to as a timely election. This means you get it done within 75 days of that date. That is an entire 2 ½ months.
Why, pray tell, you may ask, do I want to take this extra step?
Short answer: because electing S Corporation status provides you with thousands of dollars of savings on unnecessary and avoidable double taxation.
Yeah, I said it. Double taxation.
The curse of every sole proprietor and partnership is that they pay taxes twice, on both income as well as self-employment tax, as I mentioned above.
S Corporation status eliminates the self-employment tax entirely, but with a small catch: as an officer-employee of your new S Corporation you need to take a salary, and that of course is subject to a similar tax.
Similar because it feeds the same two monsters: Social Security and Medicare. However, this salary, also known as reasonable compensation, can be set at a little bit less than half of your total net earnings from non-passive activity and guess what then?
You pay only ordinary income tax on the rest. Done correctly, this can save you tens of thousands of dollars every year.
This provides the flexibility to declare income on sales for financial gain with substantial tax savings on your non-passive income, while your passive rental revenue income status remains intact, not subject to SE tax.
Can you picture your real estate investment empire saving you thousands of dollars in unnecessary taxes and creating your future wealth?
Believe it like it’s real. Because there’s no reason it can’t be, and it already is for countless others.
May the rest of your holiday today 🎅❄️🎁⛄🎄 be full of joy and blessings.