151 – Real Estate Taxes with Vidal Espinosa

Synopsis

Vidal is a principal partner at Invictus Advisors, a full-service company that provides CFO, CPA, and & bookkeeping services. In this episode, Vidal will go over tax strategies and regulations for real estate investors.

If you want to learn more about how taxes work, you need to listen to this episode!

Key points

Helping Real Estate Investors

Vidal’s firm can help investors residing outside the U.S. but own properties in the country to structure their portfolio. They also help them take care of their compliance when it comes to regulations, taxes, and accounting.

Their firm can go over your business model and make a determination whether you’re on the right path or not. They can also help you understand your financials.

They can help anyone no matter where they are located as they work remotely.

Biggest Tax Mistake of New Investors

Vidal says that merely filing a piece of paper to create an entity, LLC, or trust won’t be enough to reduce your personal liability and personal tax liability. If the same entity is holding your property and also renting it out, then you are exposed.

A proper, legal structure is the foundation of every company structure and tax planning.

Vidal recommends creating a holding company that holds the asset. But it should have no transactions in the world, so it won’t have any tax obligations. Then create a managing entity like an LLC to collect the rent, generate expenses, and prepare the tax return. That entity will pass through the profits or losses to the members, partners, or shareholders. They will then report that in their personal tax return.

Depreciation and 1031 Exchanges

When it comes to depreciation, Vidal suggests looking at whether it’s more beneficial to actually depreciate the asset; or just take the expenses and absorb the profit for tax purposes. The holding company will then transfer the expense to the managing company.

It’s also best to find somebody who is an expert on 1031 Exchanges to reduce the taxes you’ll be paying. The holding company would be the one doing the 1031 Exchange, and you should start the process of looking for a new property to apply for the exchange instantaneously.

Tax Write-Offs

Sole proprietors or self-employed individuals need to be careful about Schedule C because a new bill could potentially allow the IRS to come back and charge you interest and penalties on the expenses you generated for tax purposes.

The key thing is to prove that you actually are running a business and not a hobby.

Showing that you’re generating income revenue and providing documentation that you’re actively trying to rent out the property in case you’re encountering difficulties are ways to prove you’re running a business.

Each write-off according to the tax code must both be a necessary expense and an ordinary expense, which means it’s common in the industry.

For those who are just starting in real estate investing, they can write off the education programs as part of their startup costs. But it cannot be deducted 100% in the first year since it has to be amortized for 180 months.

Startup costs are pre expenses before you launch your business, so getting your license is considered part of startup costs.

Coaching and conferences can be deducted as a tax-deductible expense for that year even though it’s an unnecessary, ordinary expense.

Seminars or learning a trade can’t be deducted for year one. Continuing education is deductible.

A vehicle that is utilized more than 50% for your business can be deducted 100% through the 179 deductions.

Form 1099

Usually, the management company renting the property is the one giving you your 1099. Even if you don’t get a Form 1099, you are required to report all income.

The best practice when it comes to independent contractors is to have a non-disclosure agreement and for the contractor to provide their W-9. If the work is more than $600, then they’re marked as 1099.

But if they work for a corporation, you don’t need to give them a Form 1099.

If you’re paying an individual contractor with miscellaneous expenses, you don’t need to include the miscellaneous expenses in the Form 1099 because those will be considered reimbursements.

Ramifications of Mixing Personal and Business Accounts

If ever there’s any doubt if an expense is personal or business, use your personal account then just reimburse yourself later.

Mixing personal and business expenses in your business expense would result in you having no control of your business and the piercing of your corporate veil if you’re a corporation or LLC.

Expenses under $75 don’t necessarily need a receipt, but you should always have proof that you met with the client.

Misclassifying Employees As Independent Contractors

If you hire individuals who have no license to do repairs in your property, then they are considered employees and not independent contractors. In which case, they have to be put in payroll and given workman’s compensation.

However, if they actually went out and bid on a project and charged more than $500, then they’re infringing on contractor law and can be fined.

New Tax Schedule During the Coronavirus Crisis

Tax returns for the 2019 tax year are due April 16, 2020, unless you request an extension of 6 months.

Individuals who owe less than $1M and corporations who owe less than $10M have until July 15, 2020, to pay without being assessed penalties and interest.

Always make sure to pay your taxes beforehand and don’t finance through the IRS or the state of California.

It’s best to talk to someone who knows your industry and knows taxes. During the year, talk to them once a quarter to go over your numbers.

Last Tips

Consult somebody you trust that has business experience.

Continue moving forward. The worst thing you can do is to stop your business as small business owners.

References

Resources

• Schedule C
• Section 179 Deduction
• Form 1099
• Form W-9

More from our guest

• Call Vidal at 619-677-6512
• Or send an email at jredondo@invictus-advisors.com