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