As land investors, especially if you are just starting out, will want to know how your business will be taxed.
Let’s use Walmart as an example. Land flipping is viewed by the IRS similar to how retailers like Walmart buy products and sell them at a profit. Regardless of how long you hold the product (or property), it’s considered a flip. Ordinary income tax and self-employment tax apply to flipping, even if you hold a property for more than a year.
This is different from long-term investments like rentals, which are subject to capital gains tax.
Choosing the right entity structure is crucial for tax savings in real estate flipping.
We recommend starting with a single member LLC, which provides flexibility.
Later, you can consider transitioning to an S corporation for more tax advantages. Separating your long-term investments from flipping activities helps you avoid higher taxes. Whatever path you decide to choose, we highly recommend documenting your investment intentions, and consider entity changes to optimize your tax liability.
Filing as an S corporation offers several benefits beyond self-employment tax savings. It allows you to pay yourself a reasonable salary and potentially qualify for the Qualified Business Income (QBI) deduction. Having wages from your S corporation can help you claim QBI deductions and optimize your tax savings. The decision between self-employment tax reduction and QBI deduction depends on careful analysis of your financial situation.
Ron: Welcome to the real estate investing podcast, where we help you unlock your potential freedom through land investing, real estate investing, and entrepreneurship.
Hi everybody. Welcome back to the real estate investing podcast. My name is Ron Epke, your host for this episode. Really excited to have our CPA on for this episode, Ashish Acharya.
Um, he’s done great work for us for years and he’s really helped us save money on taxes, which is why a lot of you guys are listening and also planning for taxes. So, uh, a lot of good questions that we got for the community. For this call Ashish in general, and I’m really excited. Welcome to the show.
Ashish: Hey, thank you having me Ron ,
Ron: happy to have you on here. So let’s just dive right into it. Most of our listeners, as you know, are land investors, they’re land flippers. So let’s just get started on the basics. Like how does the IRS look at this business model? We’re buying land. We are flipping it on the market right away. How does the IRS view this business model?
Absolutely. So, whenever people ask me that question, you know, they, they ask me through, uh, the tax perspective, right? Because no one cares who thinks what kind of business is this. And when people start a business, they are more, uh, worried about how much taxes I’m going to pay. So from iris perspective, how is this different than A restaurant or, you know, flipping a house or buying a rental property, all those things.
And that’s where the questions comes from. And they’ll tell me, how am I going to tax, why not capital gain? All of those things. That’s what you’re asking. So very simply, flipping a land or a house is exactly same as Walmart buying a milk and selling it to the customer. They’re flipping a milk. They buy a milk from the suppliers at certain amount.
And then this is going to sell it. Uh, to, uh, you know, end customer. So they flip a milk. That’s exactly what happens with you guys. You buy a land, you hold it. It doesn’t matter how long you hold it, it’s still a flip. That’s the other thing. And how it is taxed, just to answer, just to add to that. If you were to buy an investment property as a business model, hold on to it, and then sell it, that would be capital gain, like long term capital gain, favorable tax rate.
However, flipping, which you were talking about, You pay ordinary income tax and a self employment tax doesn’t matter if even if you are in a model of flipping a property and even if you hold a land for more than a year, you still have to pay ordinary income tax and self employment tax. So from Iris perspective, what are you doing is flipping something and it’s always taxed at a higher tax rate than compared to long term hold investment property like rentals or stocks.
You know, uh, it’s not, it’s a, it’s a business. It’s not an investment. If that makes sense.
A hundred percent. It’s What we’re buying is inventory. We are buying inventory. This inventory is not a write off. Um, this is inventory that we’re going to go and flip. And then we get taxed when we sell it on the backend based on that profit.
Is that basically in short? That’s what it is.
Ashish: Absolutely. Since we’re in the same topic, Ron, I want to say one tax saving strategy, uh, because it’s gonna, it’s gonna, uh, what people could do as you know, I know you guys are so successful and you’re, you’re. Uh, students are also very, you know, they’re making good money.
I, and some of them talk to me and, um, if you’re gonna do more of these and you also now think, okay, you know what, I’m going to start investing and build a long term wealth. I’m just going to buy a land and keep it with me. Then it’s very, it’s, you should really try to separate two activities. Meaning you buy some land and you intend to not to flip it.
But if you buy under the same, you know, uh, LLC or entity you have where you flip. And when you sell it, even though it was your investment property, you still pay ordinary income tax. It’s very hard to fight that it was my investment property. So at that point, what we suggest is put in your name or, you know, in your trust or other entity where you have nothing to do with this, uh, flipping business so that you can get capital gain treatment when you sell it.
That makes sense. Yeah. And also, also this, and I’m sorry to cut you off. If you know that some land you’re going to hold it for more than a year and you still had an intention to flip it. But you just have a document. You never had the intention, right? So sometimes a lot of developers and people would like to buy land and then develop and sell it.
So it’s always better to, again, talk to your CPA, see where you stand from tax obligations. But it’s always better to separate them, a long term hold asset, even if you intend to flip, to document that your intention was different. ,
Ron: Wow that makes a lot of sense. That’s one thing I quote a ton of, and that’s something that’s always stuck with me.
From what you’ve told me, just all the conversations we’ve had. And it was probably one of the first times we spoke. You’re like, do not put a long term investments in the same LLC as. Uh, you’re flipping and that’s essentially what you’re saying. So when you have a long term investment LLC, and that’s all long term investments, whether it’s rental, whether it’s land long term, you will get tax capital gains.
But if you start mixing those in with your flipping activities, the IRS isn’t going to like that. And you’re going to get taxed. Um, even if it’s a long term hold, you’re going to get taxed based on income. Is that correct? Exactly. So we’re kind of going off on a tangent. I didn’t have this, uh, written down, but just what you’re saying is interesting.
Cause. We are starting to push bigger deals. We’re starting to push projects on our students because that’s where like, that’s where the big money is. So subdividing is a really big thing right now. So what, what’s kind of your suggestion for that? Like let’s say we buy 50 acres, we cut it up into five, 10 acre parcels.
Maybe we sell one of them after six months, five months, but the other four parcels take another six to eight months. And then we’re over a year. I know that’s kind of a loaded question there, but if there’s like, would you just hold it for a year maybe? And then just like, cause that’s a big tax difference.
That’s 20% for a year. Is it not capital gains?
Ashish: Yeah, it’s 15. Most, if you make an around 500,000 and less, you only pay 15% plus some Obamacare tax, you know, if you’re above 250, but what are you asking is. It’s a legit concern. Once you have a high volume of this lands and you’re selling left and right, but you have some land that you know could do better in, you know, maybe after a year, and if you want to hold it, that’s exactly what I was telling you.
Even if you buy a big chunk of, you know, thing and subdivide it, I would still document your intention with your business partner, lawyer, attorney, CPAs, agents saying, Oh, you know what? I’m going to… Save half of this for myself, for my family. I’m not going to sell it. You can always change your intention later on.
If you’re going to hold more than a year, I would document that intention somehow, where you can prove, email and send the email, certain communications, and then put it on a different, uh, retitle the ownership. I mean, it’s very easy, right? It literally takes 100 and less to retitle the, um, uh, land to your, another entity, and hold it there and sell everything else.
That way, you pay. Um, I mean, uh, no self employment tax, first of all, you know, uh, and then also lower a 15% tax rate, uh, on the capital gain that what we should, we should, we should be doing.
Ron: And you’ll have the option. Correct. Because in a flipping business, you can’t 1031. Is that correct? You would have the option to 1031 if it’s a long term investment.
Ashish: Exactly! You can add 10, uh, 10 31st on ordinary income kind of deal, which is basically what this is.
Ron: I’ve learned a few things from you over the years, I’ll show you some, I I’m starting to quote, like the things you say, I’m, I’m happy that I’m learning, but we have a lot of questions. We have a lot of questions from members.
Like I said, I let everyone know that I have in your honor. A lot of people are really excited. So let’s just start kind of a basics. Like what should they file as? Um, like if this is their first year, 2023 flipping land, how should they file their taxes? Obviously I always suggest getting a CPA and always push people to professionals, um, speaking with them.
But what is like the case by case, obviously you have either filing as, uh, yourself, essentially final as a sole member LLC filing as an S corp. What are your suggestions or what are the guidelines behind those?
Ashish: Yeah, that’s, I think this would be a most important decision for Flipper once, when they start, because most of the time, if let’s say you are rental investors and you do, then you don’t really, the LLC doesn’t already save you any taxes.
So you can always get one after you buy it or close it and all those things. But. For any kind of flips like this one land or a house, then your entity structuring does take, uh, it does save you taxes. So you’re supposed to do it correctly to begin with. Man, I had some clients who came to me, uh, and you know, did exactly what you guys do, uh, but having all the rental properties in the same entities and all the investments.
This guy had to pay, I think, 300,000 extra tax just because he has the wrong entity. And he was almost crying. Uh, it came to me and we have, um, what I’m saying is yes, LLC is going to be very important when you begin. So this is, I think we, just to continue from our last conversation we had on the last podcast, easiest way, let’s say you don’t have access to CPA and you know, you, um, you just, you know, you, you’re in rush to close.
Then I would say. Single member LLC. You get a single member LLC that you 100% own by yourself or your trust owns again. But it has to be owned by one person. You can flip everything there. Start flipping there. Then you can go talk to your attorney or your CPA and a tax advisor and say, okay, I started doing this.
Is it, is it the right time for me to be an S corporation? That’s the biggest concern and you, you know, we do a very detailed analysis of, okay, at what point, you know, depending on your income level, should you be changing to an S corporation? We will do that. Your tax advisor should do that as well, depending on which state you want to be, right?
Some states, it’s, it’s bad to be an S corporation, even though it saves you in self implement tax. So not a blanket advice. Obviously, talk to your CP and attorney, but very simply start with a single mem LLC. And you can always retroactively get an S corporation for the LLC, even after a year is ended.
Easiest way, single member LLC.
Ron: So what’s your kind of like, so let’s say you’re reviewing someone’s taxes from 2022. You’re like, we got to file this as an S corp. You guys made too much money. Um, is that too late at that point? Cause for an S corp, don’t you need to pay yourself a reasonable salary? Is that too late?
Like if it’s the next year already, or how do you do that?
Ashish: It’s a very good question. So my answer is both ways. Um, that’s why we like to talk to a client before year end. So actually we can, because you can run a payroll in December, right? Let’s say everything is done. You come to me in December 1st and say, oh Cassius, I made 500,000.
How do I, you know, save taxes and after analyzing everything, let’s say you save taxes through S Corp and we can run a payroll then, it’s not a big deal, right? So, make sure you talk to a divisor before year closes so you can run a payroll. That’s the one most important thing, but even if you come to me after December and you know, you have potential to save, sometimes S Corps can save you, let’s say.
Um, you know, 50, 60,000 in taxes, just the right entity, right? And if that’s the case, then we will, uh, I, at least me, I would take a risk of finding an escort and not even without the payroll, because there are some court cases that have said, okay, and it’s the first year it happens next year, catch up on your payroll.
It’s court cases having allowed that. So why lose 60 grand and not take a risk? And that, and I still leave that up to the client saying, okay. This is the court case. This is what happens. Do you want to do this? And most of the time they will say yes. And, um, and you can always go back and do it.
Ron: And so that’s, is, is essentially filing as an S corp.
Is the main tax saving going to be that a self employment tax? Or is there other benefits as well to running a payroll and all this? Cause when you have an S corp guys, you need to run a payroll. Um, you need to do all this. You will save money on self employment because outside of the payroll, you don’t need to pay self employment.
Is that correct?
Ashish: Absolutely. But that’s not the only, um, reason you would have an S corp. There are other things like there’s something called QBI. So let’s say you make 500, 000. Um, You will not get any QBI if you are Schedule C because you’re, you know, you’re above that. There’s a threshold, uh, where, you know, you don’t get QBI unless you have wages.
If you are Schedule C, you cannot have a wage. Schedule C, meaning, you know, single member LLC without a S Corp election, cannot pay wages to your, uh, to the owners, right? So just to have that wage, if you go and create, um, if you go and create, uh, S Corp, then you can have wages to you, your spouse. Right. You can even hire your kids if you want.
Uh, the more the ways, the better the tax savings become. So it’s not only the self employment tax, but it’s also the wages will qualify you for something called a QBI deduction. It’s 20% of your taxable income. Uh, so that’s also pretty significant. And you might just lose that if you haven’t, you know, if you don’t have an S corporation too.
So again, we have to optimize how much ways. Uh, gives you optimal tax savings from QBI versus self employment tax that you have to pay on the way. So again, the analysis has to be done, but to answer your question, uh, is QBI self employment tax and paying your spouse. So this is another thing. Remember your spouse might already have a full time job is already over the FICA limit and you rather pay your spouse W2 ways while meeting the, uh, let’s say you hire her as a CFO or COO or whatever you want to hire her as or him or her.
And then you pay them rather than pay yourself more so that you also don’t even pay self employment FICA tax, you know, even on the wages. And it gets complicated. All I’m saying is there’s so many, so many ways to, you know, uh, do tax planning once you have an S corporation and depending on your situation.
Make sure your tax advisor is putting everything in writing and numbers. So it makes sense before you pull those triggers there.
Ron: For sure. That makes a ton of sense. So as you know, Ashish, um, we do, and you see from our tax returns, we do deals in pretty much every state in the country. So a big question is like, how do you do this?
Um, for us, we have one LLC and then I don’t even know, honestly, everything that goes on in the backend with you guys. Um, but let’s say someone’s doing deals in five states, like. How does that look from a tax perspective? Are they paying state taxes for money that they made in states? Where does that look like?
Let’s say they’re based out of Ohio, like we are, uh, their LLC and then they’re doing state tax in other states. What does that look like? What should they expect from that?
Ashish: Yeah, that’s the real concern. Uh, most when you, when you start out. You don’t really care about, uh, in a state, what’s going, what I’m going to do, go to the deals because you’ll just go and start selling properties, which is great.
Two things needs to happen. Make sure you’re, you have a good accountant and a bookkeeper who keeps track of sales per state, by state. So you can report the sales there. There are two, there are two kind of taxes, right? We don’t deal with sales tax, like excise tax that you have to pay to the state. Easy to do.
If you have been tracking all the sales and everything per state, you know, they will, you can go online, put in a, how much money you made in that state, and you can pay sales tax. That’s a whole different thing. Some states require, some states do not require. Each of them have their own rules. I’m not going to go to sales tax area.
I’m going to focus on income tax, which I focus on. Income tax are more complicated because there’s now apportionment and allocation. So many things needs to happen on the backend. Your job as an operational of the business and how you operate businesses. Make sure you have a good records. You go and track all the sales by state, we request that your, your bookkeeper will give us that.
And when that happens, we go and look at the threshold per state. Is it worth filing in that state? Uh, or are we required? Because some states are, you know, worse than other, sometimes tax compliance fee might be more than, you know, the penalty you might get charged, right? So, and then we de determine, okay, is this better to file in this state or not?
California, you always file because they’re bad. Some states don’t really care. So we have to really focus, and that’s what we focus on. And from operational, though, I would not get too hung up saying, Oh, I’m doing business in so many states. I’m not sure what’s gonna happen. I mean, it’s the cost of doing business.
Do the best you can do to sell in every state. It doesn’t really matter. Uh, make sure you have a good record. Then your CPA will go and allocate income to the state, and you do have to file an estate. So, from income perspective, just everyone needs to know this. You’re not paying double tax, though, right?
Let’s say you sell half in Ohio and half in… And Kentucky, then you pay tax in Kentucky. You don’t pay that tax again in Ohio. Uh, you did, you, you know, you, you, it balances out. You just have to report it correctly, but you don’t pay double tax. And I want everyone to understand that.
Ron: So that’s something they should probably communicate pretty well to their CPAs.
I assume before they, cause you want to, with this business guys, you need to make sure you have a CPA that knows what the heck’s going on. Um, and if you get into this and then you like. Send them 20 properties in seven different States at the end of the year. There are some CPAs that are going to be like, I don’t know what to do with all this.
Um, and they don’t know it from this perspective. So I would assume that’s a conversation up front from us that they should have. Like, listen, I’m doing, I flip land. I don’t just do it in one state. I don’t just do it in Ohio. I do it in Florida, South Carolina, Georgia, whatever it is. Um, that’s something they should communicate upfront so they can kind of, I don’t know.
I think you can kind of see from an accountant’s face, like, okay, maybe they can’t handle this.
Ashish: Yeah, you So no. How normally, hopefully, if, if they, if, if you’re working with decent c p a, they will, you know, they, they’re talking to you throughout the year and they’re asking you what’s happening. And if as soon as they know you’re in multiple state operation, then you know they will, um, they will bring that up if they know what they’re doing.
Sometimes I’m, I’ve seen returns for 10 years, even haven’t been apportioned, and they get a notice from state and then they’ll start looking for better accounted. It happens too. So, hopefully this kind of videos that you guys put out is informational and helps your, you know, students and everyone else to realize that don’t wait until you get a notice because it gets more expensive to file 10 years of returns and pay all these penalties.
So, you’re right. You just need to give all the information. Work with someone who is more, who has time and who talks to you about the planning and what’s going on. Just don’t go for tax preparation service. Otherwise, they just crunch your numbers, give you tax return without asking you anything.
Ron: Yep, exactly.
You got to communicate with your tax account. Cause it’s more than just what you provide. She’s so valuable. Like it’s more than just the tax returns. Like it’s also tax planning, which is a huge part. Like guys paying less money on taxes is making you more money. And some people don’t realize that. Like if you are filing as an LLC or filing wrong, he said it could save you 50 That’s 50 or 60,000 more in your pocket that is untaxed.
Um, in your pocket to put into more deals to put in long term investments, whatever that situation is. But let’s get into the kind of the tax savings part. You talked about some with the S corp. Um, what about real estate and professionals? Can you touch base on that a little bit? Like, is there value in that obvious, or you can talk about that from a, we can start basic on that and we can go from there.
Um, can you talk about the real estate professional status? Maybe just start like what it is honestly.
Ashish: Okay, no, this is good. So if you’re in a land flipping business, I’m, so here’s the thing, this is how it works. Most of the business, like rental investors, they, they’re not there to quickly flip a property and make money.
Their long term wealth, you know, they might have their full time job, they just buy this investment property and stay with it and maybe sell this, you know, once or twice in the next five years and make some money and move on. But flipping business, like you know, makes a lot of money. You go, you flip to make money.
It’s not like, you know, you flip to lose money. Rental, you know, yeah, and people don’t understand, on rental property side, like commercial, any kind of real estate you hold, you rarely, you know, with depreciation, you’ll never have kind of huge income that impacts your taxes, most of the time, if you do things right.
Flipping, man, it just, it throws you in a whole different tax bracket. And as soon as you, like your students, right, they will have a full time job and they look at you and they start doing this and they’ll make 200,000 the first year. That 200,000 just bumps them in from 32 tax bracket to 37 and they pay a lot of taxes.
Now, where does a real estate professor comes into play is how do you manage your, uh, your career wise and your spouse’s career maybe, and or even your own career, depending on how much money you’re making and if you are ready to quit your job. So this is how it works. Why is so important? Let me tell you why it’s so important.
You make 500, 000 through a land flipping business, let’s say, you have no other income. And then, uh, you, you probably, if you’re in, if you’re in, you know, the normal state would taxes you 5%, let’s say. Then you’re paying almost 120, in total tax. You could save entire 150,000. Maybe not entirely, depending which state.
But, you know, at least 100,000 completely every single year, if you could understand the value of qualifying as a real estate professional. From from iris perspective and then managing your own money and investing in such a certain way and you know, uh, rental property and other properties so that you can offset your income without losing money.
And that’s the other thing people need to understand. Any other business restaurant or if you open up, um, I don’t know, you know, tea shop, you have to actually lose money to save taxes and you made 500,000 dollars, you need to spend 500, 000 dollars to not pay any taxes on the 500,000 dollars. However, in real estate, you make 500,000 dollars to your land flipping business.
You go use that money to build your asset. You buy another, you buy rental property, just buying the rental property and meeting these requirements. Can completely offset your income without losing the money. So they are pocketing extra 150 grand tax free or maybe 100,000 dollars tax free Every single year and that happens a lot Uh as you grow and as you have you know more money coming in and as you’re building your long term wealth Everyone does that why not do in the right way?
So you’re not paying 100 to the IRS .
Ron: Absolutely. Yeah. And that’s called a cost segregation, bonus depreciation. You guys can look that up. Um, as far as like the tax savings on that guy, it’s a cheat code, honestly, but it’s a legal cheat code, like to paying no taxes. It’s a realistic thing, especially for land flippers.
Like you said, are putting so much time into this, right? Cause that’s you, there are requirements for being a real estate professional.
Ashish: Maybe I can, I know you asked me what, what, what is rep status? Let me, let me, let me answer very easily. Uh, so, you know, people can understand if they qualify or not. If you’re flipping land.
You know, if you’re working full time, then you already qualify as reps. If you’re doing flipping land full time, then you already, you already qualify as reps. Now your next step is to, okay, how can I work with my tax advisor? So my, all my longterm investment can benefit me. It’s very simple, easy. If you are doing this part time, then you could also qualify.
If you have a full time job, it’s going to get harder and harder and you need to talk to your advisors. Okay. How can I manage my and my sponsor’s career? So I qualify. It takes time to, you know, understand it. Rules are complicated. And it’s very simple rule. I’ll tell this and maybe, you know, if anyone wants to know, they can Google this.
This is, this is complicated, but information is out there. All you have to understand is this. You got to work at least 750 hours in real estate. Let’s say flipping, flipping land. 750 hours flipping a land a year. That’s the first requirement. So if you do full time, you qualify. That’s what I was telling you earlier.
Now, if you have a full time, there’s another prong of tests. And that says you have to work as much in real estate as any other thing you’re doing in your from career personal service, like job wise. So if you have a full time job, then you have to now that 750 hours bumps up to 2,000 hours because normally a full time job is around 2,000 hours So so all that to say is if if you have a full time job You got to work 2,000 hours before you can qualify as reps if you have no job 750 hours and then you’ll qualify but remember for land flippers is very different Just qualifying as a rep status under the land flipping business does nothing to you Now, then you’re going to have to layer in real, uh, material participation on your rental properties and how you manage that.
All of those things comes into play. So you don’t need to talk to, uh, talk to, uh, your advisor. But the good news is that if you’re doing this full time, super easy. You just need to manage few rules and your CPA and your advisor will probably help you with that.
Ron: Yeah, I think you probably see it a lot of she’s like, and we probably talked about too much or not enough guys, like in terms of like, this is flipping and this is income that we’re getting, like, like she said, like, we can easily make 500, 000 a year and, uh, this, but like, how do we minimize taxes and how do we build longterm wealth?
This does both of those. Buying rental properties is going to minimize or erase your taxes. Um, it could erase your taxes for multiple years, one year. If I buy enough rental properties this year, it could erase my taxes for the next three, five years. Those can roll over, those, uh, things. But I’m sure you see it with clients, stuff like that.
Like, the most wealthy long term clients are the ones who are minimizing their taxes as well as buying these appreciated assets, right?
Ashish: Exactly. And, um, I mean, I’m going to tell something next step because we see so many, we see who just started, we see a multi millionaires who have done this, right? And various businesses.
So just you, and this applies to you as well, Ron, and this is what we’re going to talk about in our planning call next is that now you have kind of established this business in a way that it kind of runs itself. You have employees, you have an analyst and everything. Now, this, we talk about this rep status so much, right?
Or you can, if you qualify as reps, you go save, um, a hundred thousand on taxes. Yes, it happens, but there is a trade off. Like, you have to get involved in the business. Think about, you know, again, there’s no politics in this, but any, any lawmaker does exactly what I’m talking about. Let’s say Trump, right?
He’s a real estate investor. He came into the office, he made a 100% bonus depreciation. He’s paying zero taxes because of that. He’s not trying to go and qualify as reps. I mean, he doesn’t have time for that, but he’s still paid zero. Even without qualifying as reps, he or she or any kind of law, all the lawmakers will use real estate to save taxes, and there’s one way.
And that’s the next step of for your students and even for your business is qualifying as reps converts all your rental properties to non passive so you can offset your non passive business income. That’s normally 90% of people who get started with real estate does. But as you become more wealthier and rich and high net worth individual, then what you do is you do reverse engineering.
What you do is, now I want a vacation. I want, I don’t wanna work anymore. But how do I still, I have my business with my employees, run my c e o run, my analysts run. How can I now have, still have a real estate to offset the income? That’s where the reverse, uh, kind of engineering of the, um, this passive activity law rule comes meaning now you become passive in your own business.
You spend less than, let’s say 500 hours. Managing your business have everyone else managed then it becomes passive. Now, you don’t have to qualify as reps You can buy anything in the world another I mean in real estate right in the in us and then do the same thing across aggregations and bonus depreciation Without qualifying as a reps you can save that and that would be Nick that would be for you Ron It’s gonna be your next step in your business and you know What how you all because you have different businesses, right?
You can you at least have one business or two business become passive So you can have, without even qualifying as reps, you can have, uh, long term rentals and storage units and multifamily houses offset those income going forward without even qualifying as reps. So, again, it really depends where you are, what you do, how much money you got.
So many things come into play. You’ve got to work with your tax advisor.
Ron: Yeah, I 100% agree. It’s something Ashish is on us constantly about like trying to get this long term stuff and it’s hard sometimes like because it takes time to find good deals. It takes time to find good rental properties. I’m not throwing my money anywhere and neither should anyone like you got to put time and effort into finding those write offs, those rental properties that are going to be write offs.
So how, how do you suggest we’re gonna go backwards a little bit. So someone’s starting out there by, they bought a deal for a hundred thousand, sold it for 200, 000. Um, they plan it’s earlier in the year, whatever situation is like, do you suggest, or what’s your advice? I don’t know if it’s necessary CPA advice, but what’s your advice on like setting aside taxes or what’s kind of, what should their mindset be when they’re starting to make some money?
They see this money kind of piling up. They don’t want to put all their money into inventory. Cause as we talked at the beginning, inventory is not an expense. You are going to owe taxes on everything you made money on. So what’s your kind of advice there in terms of setting aside some for taxes?
Ashish: Exactly! You know, before I go there, Ron, I want to mention this to all of you and, um, all of your, um, listeners, even you is that I was talking about this with my other, um, same, you know, some flippers, basically both kind, this applies to you as well. Whenever you sell something and you make that money, I know, I know as a business operational, you’re going to go and buy another inventory so you can sell it, right?
I mean, if you find a nice deal, but before doing that, just make sure you take the money out of the business and then maybe recontribute to the business and then buy it. And here’s the reason, because let’s say you make a million dollars, you take nothing out of the business and then you put everything back in the inventory.
When you go by, go by and go, if you’re going to buy a primary residence or investment property. Bank is not going to like that. Bank is going to say, yeah, you made a million dollars, but everything was used in the business. That’s not your money. Your business is a, you know, it’s a cash. It needs cash to operate.
So you just made the cash. Your business is using it. You’re not using it. It’s your money. You have no DTI and debt to income ratio goes very, very down to qualify for the loans. So to counteract that, what we do is we have to show distribution in your, you know, in your, in your K one, meaning in your tax return.
So as soon as you make money, we’ll take it out and let her put it back and then buy and buy the land again. Again, there’s no taxable transaction. It just How to present it and most of the cpas will not understand because they don’t they’re not involved in real estate They don’t understand DTI. They don’t care about your lend-ability, right?
But I do because and I have i’ve suffered myself most of my clients will come New clients will come to me and say oh, I don’t qualify for the loans and I have million dollar in my business So you have to amend your tax return. Sometimes you cannot even amend your return. So they lose on so many deals meaning Before I go on into your assign our the inventory cash tied inventory The, the first step I want every one of your students, especially when they’re starting out because they can start making money and they go want to implement a tax saving strategy with rental.
They don’t qualify for the loans. So for them to qualify, make sure you’re taking the money out. Don’t spend it. You can put it back and buy the inventory. Does that make
Ron: sense? Yeah. So business bank, you, you sell the property, you get money in your business bank. Uh, distribute that to your personal bank and then is there a time period that a lender is going to want to see that staying in your personal bank?
Ashish: No, I don’t. They’ll never ask you that. All they care is when, if you do that, your bookkeeper is going to take that cash out as distribution. And when the tax return is done, you’re going to have You have, you know, 300, 000 moving as a distribution and the, uh, the lender just sees the tax return. They don’t care about timing.
Right? So that’s how it works. There’s no, uh, holding requirement or anything. You can put it, take it out, put it back. And honestly, what you can do is, um, every single time transaction happens, again, so easy to transfer money on nowadays and online, you don’t even have to write a check, transfer it out and put it back right away.
And your bookkeeper will handle the rest. If you don’t have a bookkeeper. CPA will can show that as it is, uh, if you don’t have a bookkeeper, but, um, you’ve got to do that.
Ron: That’s called a distribution going out to yourself. What’s that? What’s that look like on tax returns going back into the business
Ashish: is depending on how you want to structure it.
It can be, uh, additional capital you put in a business, which is not taxable because you’re putting more money or you can show as a loan to your own business and, um, as a, you know, as a loan from shareholder, you can do that too. It’s the same. There’s no tax implication whatsoever. Yeah. Yeah.
Ron: Got it. That makes sense.
So yeah, so going back on that. So what should people be setting aside? So let’s say they, they made 100, 000. Um, do they, they, they distribute 100, 000 to themselves? Do they keep 30, 000 in their bank to, uh, keep for taxes? What’s kind of your advice on that?
Ashish: So my advice, if you don’t have a CPA to begin with, then I would say you, you kind of know your tax bracket.
And if you know, by just looking, Googling it, keep that much set aside. If you have no other tax planning done, right? Uh, and especially if now, if you don’t even have a, you don’t even know if you’re going to be an S corporation or not, there’s another 15% on top of your ordinary income. So honestly, depending on how much money you’re making and, uh, in self employment tax, if you’re making 200, 000, 300, 000 between you and your spouse, you’re still less than your FICA limit between, you know, one of you guys, then you might need to set aside 50%.
So that’s why it’s so important as you start making this money, so important to talk to your, uh, you know, tax advisor who can run your numbers. throughout the year and tell exactly, okay, what’s the obligations you’re going to have. But I would, I suggest if you can figure that out, if you are subject to self employment tax or not, it can be as high as 50%.
Safe, you know, if you’re not, just because you do not go bankrupt when you have to pay taxes, I would say at least, depending on which state is out, honestly, as a flipping business, and it’s taxed at the highest marginal tax rate, whichever tax bracket you fall, I would save that much. Now, now though, if you go to talk to an advisor and they say, okay, you know what, looks like you met.
300 thousand dollars, but it looks like you’re going to go and buy these rental properties and everything So you’re actually not going to owe anything you’re going to get money back Then you don’t have to set aside you can For my clients what I do is rather than setting aside hundred thousand dollars and just Anticipating to pay taxes in April.
I say take that hundred thousand dollars go buy a really good cash flowing rental property and pay zero taxes So, you know why um save money for taxes when you can go buy an investment and for a long term wealth not a flip And then pay zero taxes, right? So Again, talk to your advisor, but if you, if you have no plans to, you know, go that route just yet, I would say at least save around 30 to 40%, depending on, you know, where you, where you fall in your marginal tax bracket.
Ron: It can be a lot for sure. And that’s a good, I like that a lot. Just like set it aside for taxes, but while you’re doing that, look for some rental properties so you can use those that set aside money. You’re going to pay zero in taxes. Yes. That 150, 000 and set aside money is going to be gone, but that’s going to be gone in a rental property.
That’s worth 750, 000 if you got a loan on it. Um, and then that’s seven 50 is going to be 300, 000 of. Tax write offs, if you can cost seg it. Um, so let’s back up a little bit, like, someone’s first getting in this business, I’ll see, let’s uh, just kind of break down what they should be doing, because I think sometimes people overthink this whole thing, like, in terms of all this, because a lot of stuff you can backtrack in this business.
I, what it said, what you said at the beginning is just keep it simple, sole member LLC, is that correct? Yeah. What if they’re not, what if they have a partner or something, just a normal LLC, 50
Ashish: 50 don’t elect an S corporation without CPA. I say that because sometimes people will not understand they will have all this other assets in this, um, in a business.
So even with a partner, get a multi member LLC, it’s, you know, you have two per member in the LLC, use that one. And you can always go and retroactively elect an S corporation, even though you’re late, it has to be done within three and a half months. But you’ll be fine. Your CPA will do some magic to make it retroactively.
It’s always a better idea to go, you know, before even getting entity structuring, it’s always a good idea to talk to your CPA. I mean, I kid you not. I have so many clients who are students who actually emailed me through your group and they’re not my clients. They just say, Hey, I liked, uh, you know, Ron said, you’re great.
Can you help me with this? And I have done 10 different entity structuring session with them. We don’t charging them because, you know, I just like to help those guys out. And they really appreciate that. So again, reach out to me. I’ll help. If anyone needs help, I don’t charge you. Okay. I’ll just, um, give you the entity stock string that you got to follow, but do not create without understanding it though.
It might hurt you rather than saving money.
Ron: Awesome. No, I really appreciate that. Um, I think this episode was, uh, long overdue cause we’ve been getting our, our community has been growing. People are making money. So if you’re making money, like figuring out tax, as you make more money, like you’re working a job, making 60, 000 a year, like.
Don’t worry about taxes, just make more money, figure out a way to make more money. That’s where a lot of those people came into this community and now they’re making 60, 000 W 2. They’re working 10 hours a week as a land flipper and they’re making 200, 000 as a land flipper. Um, but any last, uh, pieces of advice, anything like that for anyone in our community?
I know, uh, this is going to be really valuable for them already, but any last piece of advice before we end this?
Ashish: Yeah, you know, I have one thing to tell you and you have, we have talked about this. And you, uh, not just your students, other people have been asking, asking, asking me this is how to, you know, be in, um, they do a lot of joint ventures, like you fund a deal in here and there and, uh, they get confused and they will, the sad part is that someone will, someone will just go online and create five different LLCs for each joint venture with the other partner in the group and start flipping a land and make 20 grand and really lose money or filing tax returns.
Meaning, do not create LLCs when you do joint ventures with your friends or even your mentor and stuff. Come up with an arrangement where there is no tax filing obligation for your joint venture. And you know how to do that, I’m sure you tell to your students. Just make sure you do a commission based, you know, like a real estate agent based relationship where even if you can divide the profit but do not create a joint venture, a JV agreement.
Don’t sign anything saying JV agreement, a partnership agreement. It creates a partnership. Tax filing obligation and it can start from two thousand, it just gets very expensive if you have five, that’s ten thousand dollars if you have five deals. You lose money. Don’t do that. Uh, that’s my, uh, I know, departing advice because people will lose a lot of money.
Ron: Awesome. I really appreciate it. Thank you so much for coming on the episode. Um, again, guys, if you guys have not subscribed to our YouTube channel, please do that. Like subscribe this episode. If you guys have any other, uh, episodes, any other interviewer and any other interviewees you want us to have on, please put it in the comments.
We’d love to get people on, um, experts like this in the field, experts that can make you guys more money and save you guys money with taxes. Other things like that are amazing. Other than that, guys, have a good day. We’ll see you next time.