Trust Attorney Las Vegas | Rental Real Estate Taxes?
Hello, this is the trusted podcast and I’m your host, Blake Johnson. And thank you for listening today. We’ve got a great SHA podcast lined up. Today we’re going to be talking about, uh, rental real estate, what that looks like. Um, you want to talk about some tax, um, parts of that. We’re gonna be talking about the estate planning part of it. We’re gonna be talking about the business structures and how that all works with regarding to having a rental real estate, whether it’s residential or commercial, a lot of the things that are going to apply the same way there. So let’s dive right in. A rental real estate, um, you know, pretty widely known as, um, you know, a great way to, uh, build some wealth and to also have cash flow to pay for, uh, your retirement or your lifestyle or anything like that. So, uh, I’m not going to get into the investing side of it Trust Attorney Las Vegas.
That’s, I think, you know, something that needs to be covered by a specialist there. I want to talk about, you know, let’s say you have the real estate and you’re renting it out and what, what do you need to do, um, after you get the property. So you get the property, um, and you’re about to get your first renters in there. What does that look like? Well, the first thing you want to do is you want to make sure your property is owned by an LLC. Do not want a corporation most of the time because it’s not as flexible. Um, whereas the LLC can be a lot more flexible. One of them. And then the, and I, um, examples of that is if you own property in a corporation and you want to move it back out to your, your personal name. So let’s say you had a house, you lived in it, um, for at least two years.
You move out and you start renting it out. And if you put that in a corporation and then you sell it, you know, within three years, cause there’s the federal exemption that says if you lived in a property two out of the last five years, then you don’t have to pay any capital gains tax on it. Well, so if you want to move that house back out of the corporation into your personally, that’s a taxable event. So you would negate the ability, um, to not have to pay that capital gains cause just moving it from the corporation back to your name is considered a taxable event. You’d have to pay the capital gains on it and you would lose that exemption Trust Attorney Las Vegas. So that’s where we’d want to make sure we have it in LLC because you could move out of the LLC, no problem. Back to your name, sell it, not paying capital gains, you know, good deal.
Um, I’ve personally done that. So that’s, that’s number one. LLCs, 99% of the time, that’s what we’re going to do for actual property. It just gives you more flexibility as far as that goes. Now, uh, after you have the LLC set up, you have to actually transfer ownership. So you have to do the deed. Now if you’ve got that property, you know, uh, in a loan, most likely that loan was in your personal name. So the deed that was recorded was in your personally and they won’t let you do an LLC unless the LLC has a tax history in a credit history and all those things. So if it’s a new new LLC, we’re gonna have to transfer that in there. We’ll PR, we can prepare the deed and your attorney title company can do it after the fact. Transfer ownership from, um, the, your name into the LLC name.
Now you know when you have that, that provides protection, that’s the LLC. What it does is it provides a layer of protection and says, all right, if anything happens on this property, the most of those, if somebody sues you that they would get is the vibe of that property. They can’t come after any of your personal assets. So your personal house, your bank accounts Trust Attorney Las Vegas, your investment accounts, any other investments that you may have. That’s why an LLC is important. It gives that layer of protection. It’s the final stopping line. Now the caveat is you have to treat it like a business. So you have to have a separate bank account. It has its own tax ID, um, and it has, uh, you know, you, you account for all the business expenses, go on a business, uh, credit card or you know, um, business account. And then, you know, when you were wanting to take money out, you’d do a profit distribution to yourself and then you pay your personal expenses out of your personal name, not out of the business.
So you don’t pay for, you know, your kids new shoes out of the business. You don’t pay for, um, you know, your, your luxury vacation out of business unless it’s a legitimate business expense. And there are ways to write that off. That’s one of the great things about having an LLC or a business in general is that you can have, you can write off a lot of stuff. And when I write off, I mean deduct it from your income so that it doesn’t go on your income tax because the, the way a business works, you know, personalize for taxes, you get income that’s generated, the government takes their check first and then you get the rest. Well with the business you get paid, you spend as much as you can on, you know, different things and then whatever’s left over then you pay the tax.
So it’s really kind of a completely different way of looking at things. And that’s where w true wealth to start to be made is when you can reduce your income tax significantly through your business. So, um, let’s say that, you know, it’s you and a spouse that owned this business and at least once a year you need to do, um, a manager’s or an owners meeting to determine what the, the way the business is going to be run in the, in the next year. You can take a vacation and make sure you have that meeting, keeps him notes, habit sign, and then you could try it off that trip or at least a portion of it. So that’s one way to take advantage of that. So that’s kind of a sidestep there. Um, coming back to, to the LLC, you have it set up, you’ve got it in the trust, or sorry, in the, um, in the LLC properly.
Now you’re ready to get your first tenant in there. What do you need to do then? You need to get a rental agreement, a lease agreement, and you know, lot of the forms you could for this, you could find online. You know, I’d still advise you go to an attorney, but most of the, the lease agreements, if you, especially if you can get it from like a realtor, they’re pretty standard Trust Attorney Las Vegas. They’re going to cover your pretty well. Big thing there is you want to make sure that the lease is that they’re making payments to the new LLCs, not to your name individually. And that you have all the terms in there as far as you know, is it a, is it a 12 month lease, is it a, um, you know, two year lease. What happens if they just continue but they don’t sign another, you know, longterm thing.
How’s the month to month work? Is there a security deposit involved? You know, how soon do they get that back? How much notice do they have to give you if they’re going to move out? You know, what happens if they do damages you? Those are the main things that you want to do to have yourself covered with a lease agreement Trust Attorney Las Vegas. Um, so then you have that in place. Then, um, you know, make sure the house is clean, take pictures of before so that way when you come back, when they move out, you can compare it. Say, okay, yup, that’s usual where or Nope, you guys damaged that so we can charge you for it. Then, um, you know, then use the LLC for write-offs. So things you can write off and start considering is, um, you know, part of your cell phone bill because you have to communicate with the tenants.
You can, uh, if you work out of home to run that you may to be able to deduct, um, part of your, your home office, uh, is another deduction. No, I’m going to put the caveat here. I am not a CPA. I am not giving you tax advice. I’m just sharing with you things that I’ve been able to do in the past for myself. Um, and are things that I’ve seen clients do, but you want to hire a good accountant or CPA, preferably a CPA who is going to help advise you on what stuff you can write off, what stuff you can’t and help you with your, your tax preparation. Now, um, I do also want to point out that with the, with an LLC, if it’s a single member LLC, so you own it by yourself or if you’re in a community property state like Nevada or California, if you, uh, even if you’re a husband and wife owning the property or they’re the business, you can have it flow through onto your individual tax return.
And I believe that goes on what’s called the schedule C. now I would advise not doing that because if it goes on your individual return with the new 2017 tax law changes, they took away a lot of the deductions. So this is the main area. The business deductions are where um, a lot of audits are going to take place. And the standard that you have to look at is, was this a legitimate business expense? So your standard is pretty high. You have to show where you were, you know, what you did and why this was a business expense. Whereas if you file a separate business tax return, the standard now becomes, would a business spend money on this type of thing, which that’s really easy to prove. Yes, businesses will spend money on cell phones or on phone services for their employees because they need to communicate with them or you know, they need a, you need office space to run a business.
So that’s a legitimate expense. Um, you know, you need internet, you need, um, you know, to be able to uh, you know, take it, uh, or owners need to be able to plan for the year, all those things. So I would highly recommend, um, you know, if you can file the separate business tax return for your LLC just to help reduce one, reduce the chance of audit. And then if you do get audit, make it a lot easier on yourself to not have to justify, you know, every little thing and show, show all the details of where you were. Once again, this is where you talk with your CPA to see if it makes sense from a cost perspective to file that separate return versus um, you know, having it on, on your personal return cause it obviously you have to pay for the CPA to prepare a separate tax return.
Um, it may delay the ability for you to file your personal tax return. So those are all issues that you need to look at. Um, but that’s my 2 cents on it. Now. Um, other thing is property management. If you want to, you know, be the property manager yourself, deal with the tenants directly, that’s great. It’s going to save yourself some money. Um, but then you’re the one responsible for doing the lease, doing the walkthrough, making sure that they are keeping it clean, that they’re paying on time and doing all that Trust Attorney Las Vegas. A lot of times most people want to do, have a property manager do that. They take a percentage, usually somewhere between eight and 10% of um, the full rent that’s paid, not the profit, it’s the full rent amount. And, um, you pay them for their service and they’ll take care of the whole Reese lease agreement, finding, finding tenants for you and um, you know, collecting the rent and doing the checkout.
You know, if people call in need fixes, they’ll, they’ll take care of it and then they’ll just bill you for it. So that’s an option there. It’s a lot more hands off. And then there’s some, you know, it’s a less liability on you to make sure things are done correctly, but it’s that, once again, do they analysis, does the cost make sense? Now let’s say you’ve done really well with this one rental property, you’re already acquire a second one. What do you do with that second one? Well, the traditional way was to protect it from the set. The first property you had would be to get a separate LLC for that new property. So if you start getting lots of properties, you have multiple LLCs that you had to keep up with. Well if you live in one of the few States like Nevada, Utah, um, or the, I think there’s 14 total in the United States that have what’s called a series LLC, it’s kind of the best of both worlds.
So the way that works is you put house one or property one in series one, property two in series two. And from a liability standpoint, each series acts as its own LLC. So it’s as if they’re in totally separate companies. So if you get sued on one property, they can’t get the other. But the nice thing is you don’t have to have a separate filing with the state because you know, when you set up an LLC, you have an annual filing fee that you have to do. Um, and it just depends on what state you’re in, how much that is. In Nevada, it’s 350 a year. For an LLC, Utah’s is only 15 or $20 a year, so a little bit more affordable. Uh, but then you also don’t have to file two separate tax returns. You account for each series separately. So, ideally you have a separate account and you keep the expenses with that one series separate and the income and so on.
But then you pull all of that together and then you have your CPA file, your one tax return, uh, for that whole that, for that one entity. So it’s benefit of having multiple LLCs from a protection standpoint, but the also the benefit of only having one LLC from a cost perspective. So that’s a series LLC. Not every state has it. And if you happen to be in a state that does great, um, you know, we can, we can use that and help you out there. If they don’t have series LLC, then I would recommend you have a separate LLC for each property to make sure they’re protected from each other and not pulled under one LLC where if somebody sues you, they could get the value of all the properties. And, um, if you have partners involved, then you want to have partnership agreements. So, um, you can have a buy sell agreements or at least minimum, you want to have an operating agreement that take dictates the terms.
As you know, how the business operates, who does what, what’s gonna happen if one of you dies and so on, and then make sure that your LLC is owned by your trust. So those are topics that are covered in, in different podcasts. So we have the buy sell agreement is a really detailed one about, you know, if you want to, if you don’t want to be in partnership with your partners or spouses or kids. Um, we also have the business succession planning and then we have the, the general estate planning. So have your LLC, uh, owned by your trust to avoid going through probate court is the G as the, the main thing. But, um, you know, there’s more details to it. So listen to those other podcasts if you can, um, to get more detail on that. So that is, um, you know, my, my 2 cents on rental real estate from a legal perspective and a little bit of a tax perspective just from a personal experience.
Once again, I’m not a CPA, not giving you advice. I highly recommend you find somebody you trust that you know, ask around who a good CPA is that knows rental real estate because it’s a different beast than, than traditional it just income tax filing. Um, one of the great things about rental real estate is you get the deduction of depreciation on the building. Um, so make sure that they know that as well. And um, you know, that can help offset some of your income and it was, I’ve talked enough today. Um, and so thank you for listening. Uh, if you can, uh, subscribe, if you’re not already a subscriber to our podcast, please do so now. So you get all the new content when it comes out. Uh, leave us a review, let us know how we’re doing, what you like, what you’d like to hear more of. And then I, you know, if you have any other questions you want answered, um, you know, first check out our prior prod cast E for they’re answered there. If not, you can always email us directly. So I’m Blake Johnson, thank you for listening to the trusted podcast.