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