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Asset
Protection for Real Estate Investors
(c) Gerald Romine - All Rights reserved –
www.kickassrealestate.com
The first 10 years of my real estate investing I
ran my business as a sole proprietor because I really didn't
know any better. Luckily, I survived with only minimal damages,
but there comes a point when it is time to assess the best legal
structure to use for real estate investing.
If you ask 10 experts you are likely to get 10
different opinions. With that in mind, I'll share my opinion and
experience. Remember: free advice is always worth what you pay
for it.
If you are a beginning investor, it's probably
best to not worry about asset protection until you actually have
a few assets to protect. Why spend time and money setting up a
business entity and creating tax reporting requirements unless
you need to? It's like buying full coverage auto insurance on a
beat--up Gremlin...what's the point?
Once you have assets and something to protect,
then it's time to set up your business structure. Question # 1:
what is your net worth? Question # 2: do you have assets that
are at risk? If the answer to either of those questions is,
"Yes," then you need to take the next step.
Assuming you want to set up an entity for
wholesaling properties, the most popular are an LLC (Limited
Liability Corporation) or a C Corporation. There is much debate
about which one is better, but I prefer the C Corporation
because the first $50,000 is taxed at 15% and you can have a
kick-butt employee welfare plan to write off many expenses. With
an LLC, the income is passed through. If you start making money,
you'll wish you could pay only 15% on some of it! Trust me on
this one.
Why is the tax issue such a big deal?
Here's a simplified example. If you make $100K
personally you are taxed on the full amount (35%) and have
$65,000 left. Anything you buy for yourself comes from after-tax
dollars. However, with a C Corporation if you could make the
same $100K on paper, but have $50K in allowable expenses that
you can write off. So you get taxed on that $50K at 15% and only
have to pay $7,500 in taxes compared to $35,000 on your personal
income.
What type of expenses can you write off in a C
Corporation? It depends on how your Company is structured (see
your accountant/attorney for details), but you can often write
off basic expenses of things like a bed or even a swimming pool.
You're thinking, "No way!" Let me explain how it's done. If you
have an employee welfare plan that covers your medical expenses
and your doctor gives you a prescription for aqua therapy, it's
possible to write off the cost of the swimming pool. Yes, it's
crazy, but I don't make the laws. Another more common example is
a prescription for a new bed if you have a bad back. I have a
"Sleep Number" bed myself, just like Paul Harvey. J.
A very wealthy man once told me "It's very hard
for a C Corporation to make any money!" What he was trying to
illustrate was that C Corporations can expense pretty much
everything and look like there is little or no profit. You still
can buy the same stuff, but you are taxed less if you structure
things correctly.
About the author:
Gerald Romine is a nationally recognized real
estate expert that has been featured across North America
sharing the stage with political leaders, film stars, and
business leaders. Since 1989, Gerald has been involved with real
estate as a real estate agent, broker, rehabber, investor, and
builder and has been involved with everything from houses to
apartments. For more information about Gerald’s products or
services visit
www.kickassrealestate.com
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