Charitable Giving Real Estate

Recently traveling through West Virginia on my way out West to the Plains of Texas and the Hot New Mexico Desert, I met with a financial planner at a coffee shop and we discussed many new strategies of giving away money. Perhaps you are not aware but giving away money is one of the hardest things to do correctly.

Anyone can donate money, but giving the right way is extremely difficult. In fact when Warren Buffet and Bill Gates merged their Foundation Assets and Warren came aboard as a Trustee, they mentioned this exact challenge and they were concerned about this.

During my coffee shop conversation we discussed the Charitable giving of real estate and the gentleman from West Virginia also a member of the State Legislature told me of an older lady who donated her families hotel to a Church in Charleston WV. The way it was done was very smart. The Church took out an annuity life insurance policy for the lady and she gave them the building.

People often donate millions to American Cancer Society this way and the organization buys them an Annuity. Yet it works even better if you consider this can be done for a Boys and Girls Club or some other purpose locally in the community such as hospice or historical society.

It is great to see the charitable giving in American and around the world from our people both on the massive scale of the Bill and Melinda Gates Foundation to the small scale giving in local communities. Consider all this in 2006.

Get Ready, Get Set For This Historic Real Estate Buyer’s Market

Everyone knows the real estate market is going through historic upheavals and steadily declining property values. This means pain for some and opportunity for others, especially those who are poised to become first time buyers, or who have been out of the market and want to get back in.

Getting the most out of an opportunity doesn’t happen by accident-it takes preparation. Preparation means you will be able to move into action with calmness and confidence. It’s wise to go through some basic steps to prepare for that day when you will pick up the phone and call a realtor. Here are three steps that will get you going:

Clutter Clearing

Clutter clearing is an exciting endeavor, if you know what it can do for you. Most of us don’t think much about stuff until it’s time to move. That’s when we realize there are thousands of individual items tucked away out of everyday view: kitchen utensils, that DVD collection, racks of clothes, loaded drawers, linens … and then the garage, with yard equipment, tools, holiday decorations … and on, and on and on.

Well, stuff requires space, and space costs money, and clutter takes a toll on energy. In the next step, you’ll be envisioning your dream home, so it helps to have a good mental image of your inventory of stuff. Why buy a house for storing stuff you rarely, if ever use?

Run everything past a test: Do you use it at least once a year? Will you, honestly, ever get around to finishing those projects you started months or years ago? Do you need that many shoes? (You’ve got to push through the idea of, “Well, you never know, I just might need it.” Let go. Create space for something new to happen.)

If stuff doesn’t pass the test, get rid of it. The unloading process can be a lot of fun. There’s stuff you can simply donate to a charity, there’s tons of stuff you can turn into cash through a yard sale (if you haven’t done one, you’re missing a good experience) and then there’s stuff that’s too good to donate or unload at a yard sale. Find collectors and specialty shops for things like that vintage electric train you’ve kept since you were five. Consignment shops are excellent for getting a decent return on what you’ve spent on those finer things.

People who do this step seriously report feeling light and free, and many refuse to let clutter build up again because of the joy of always being current.

Create a Vision

Sit down with your family and write down the specifics of your dream home: Is it one-story or two? In the city or in the suburbs? List the specific rooms and their functions, the number of bathrooms, kinds of closets, size and location of the laundry room, size of yard, attached garage-or detached. Get a clear vision in your mind of what you really want.

This is a very practical exercise that gives you a sense of power and saves lots of time when it comes to actually looking at properties. First, you can tell a realtor what you’re looking for-so your realtor can narrow the list of available properties, and instead of emotionally reacting to every house you see, trying to decide whether or not you like it, you will simply recognize whether or not it matches your vision.

Get Pre-Qualified for a Loan

You might be a member of USAA or other organization that offers home loans (USAA does) and that you’ve done business with for a long time. Let them know that you’re thinking about buying a home and would like to apply for loan pre-qualification. Based on your income and the amount of down payment you can make, you will be told what size mortgage you can handle, and from that, the home price you can afford. If you don’t have a connection with a particular institution, then ask for referrals from family and friends, or a realtor. Knowing the price you can afford will also help your realtor narrow the list when you’re ready to start looking.

So after you’ve cleared the clutter, developed a clear vision of your dream home and have a loan pre-qualification in hand, then call The Ron Howard Group: The team that will help you find and negotiate the purchase of that house you literally dreamed up.

Tax Saving Strategies For Real Estate Investors

Business Entity

The 1st step in doing any real estate investments is to start a business. There are different types of business entities: sole proprietorship, Limited Liability Company (LLC), Series LLC (only in certain states), Limited Liability Partnership (LLP), LLLP, S-Corp, C-Corp. Each of them has its advantages and disadvantages. The only true flow through taxation entity and the most beneficial in terms of holding real estate is Limited Liability Company. Limited Liability Company allows you to pay for business related expenses with pre-tax dollars. It is very important to understand that when you get paid and receive your paycheck, your taxes are already deducted and all your expenses whether they are real estate or business related are deducted on AFTER-TAX basis. When you have an LLC, you take all business expenses, deduct them, and pay income tax on what is left over. LLC is the only entity that is NOT subject to loss limitation! LLC does not require records and minutes of meetings. Filing paperwork is limited to articles of organization that lists LLC members. Tax Advantages: LLC is a pass through entity and if it is a single member the entity is considered disregarded by IRS. A corporation is subject to double taxation where not only the profits are taxes but also distribution in the form of dividends are taxed as well. The other advantage is flexibility in terms of LLC ownership transfer. LLC ownership is guided by Operating Agreement, which is an internal document. In order to change ownership all that needs to be done is the Operating Agreement and no filings are required besides updates with IRS for given tax ID number.It also has less filings than an S-Corp and very easy to maintain. If you have multiple properties, have them each in LLC and have one LLC to be your holding company that would own all the other LLCs. For tax purposes your main holding LLC will be a sole member LLC for the other ones and you will need to file only one tax return. In addition to the tax benefits LLC also allows you to have a basic level of asset protection.

If your business owns the assets, they are separated from your personal assets and in case of a law suit they can not be touched. Please, note that LLC is a BASIC level of asset protection and if the opposing party has a good attorney there are many ways how your personal assets can become a part of a law suit. It is called piercing corporate veil. For example, you are required to have a separate bank account for an LLC. If your LLC owns your property, then all property relates income and expenses have to come out of that particular bank account. If this is not done, the LLC status can be disqualified and your personal assets become part of the lawsuit. Your LLC must be in good standing with the state and your must have adequate information on your article of organization. The purpose of the business must be clearly stated with no exclusions and you must file amendments when necessary. If you buy real estate, you should say that you buy, hold, rent or lease residential real estate; if you sell, you must state that you buy for the purpose of resale for profit, etc. In some states it is necessary to publish LLC in a local newspaper, and it can get very expensive; in other states like Maryland you need to pay annual fee, which is currently $300 a year. You need to check on your state requirements and guidelines and always be in good standing with the state.

*RENT DEDUCTION* on your primary Residence. If you have an LLC, you might need an office and conveniently enough it could be in your personal residence. According to IRS Code 288G, you are allowed to deduct rent payments for your office space in your personal residence.

*Depreciation*. It is the most beneficial deduction in real estate! While your real estate is appreciating, you are allowed to depreciate it over the life of the building, which is 27.5 years and take the deduction against your income. However, depreciation is allowed only against the building, land can not be depreciated. For example, if you own a house that’s worth 100,000, the value of the building might be only $80,000 and the value of the land is $20,000. Thus, you are allowed to take depreciation expense against the value of the building only.

*Accelerated Depreciation*. You might have heard from your accountant that accelerated depreciation is not allowed against real estate, and it is true, but there is a way to make improvements deducted in prior years and it all depends on how they are classified. For example land improvements such as curbs, sidewalk, and landscaping are depreciated over 15 years; personal property is depreciated over 5 years. Items that are considered personal property according to IRS code 1.48-1(c) must have one of the following features 1. accessory 2. function 3. movability. Basically everything that is an accessory, functions or movable is real property. If you are doing a rehab and can install movable walls, you can deduct the cost of improvements over 5 years. If they are not movable, then you will have to take 5-6 times less deduction for improvements in the next 5 years. Make everything you can either function, be an accessory or make it movable! One commercial developer built his office building with light weight movable walls and was able to deduct $80,000 that same year.

*DEALER* status. When flipping properties it is important to avoid “DEALER” status. In some case it can be avoided by flipping properties through different entities, in some cases by doing a few transactions, but the easiest “investor friendly” way is to simply state your INVESTMENT INTENT. If you state that your investment intent is buy, hold, lease, and rent properties unless forced to sell under certain conditions like need for working capital, you can get away with not being considered a DEALER.

*IRS Red Flags*. There are also certain things you should not do that would raise red flags to IRS and you might get audited. First, do not report too much rental income loss, there are plenty of expenses you can find to reduce your pre-tax income. Second, do not over complicate your asset protection structure. Having too many business entities on top of each other, or having domicile headquarters in Las Vegas, NV, tax free state could be a red flag. Reporting losses for more than 2 years always raises red flags. The common sense behind it: “if you do not make money why are you still doing business?”. Reporting excessive donations, high expenses vs high income can also cause an audit.

*Property Taxes*. Real Estate Investors are subject to a number of taxes including property taxes. Assessed value and market value of the property always have a gap. In 2007 assessed value was normally lower and in 2010 it is 99% of the time higher than market value of real estate. The taxes are not always reassessed depending on the market cycle and it is your responsibility to dispute them. In state of Maryland it is allowed to dispute personal property taxes within 60 days off settlement date or file before the end of the year for the next year hearing. Even though taxes are a deduction against income, they are not a tax credit, and the more you can minimize your expenses the more profit you will end up with. In order to successfully dispute your tax bill you would need to show the comparables and recent sales prices of real estate in your area. You will also need to compare the real estate that was recently sold to your property in terms of structure, number of bedrooms, bathrooms, square footage, amenities, etc.

*Capital Gains Taxes*. This type of tax is imposed only when you sell the property. The difference between purchase price and sales price is subject to this tax. There are exemptions to homeowners who lived in the property for at least 2 years and the amount of profit. There is a way to defer capital gains taxes by doing a 1031 Exchange. Make sure that you contact an escrow company and do everything within IRS guidelines. According to this IRS rule you can sell your property, find another property, make an offer within 45 days and settle on a new property within 6 month and defer paying capital gains taxes. According to the IRS tax rules, the property you are buying must be “likewise” property, meaning it does not matter if it is bigger as long as it is “investment” just like the one you just sold. So you can buy a single family house and buy an apartment building as long as both were investment properties.

The information provided in this article is just a general overview and not a legal advice on general real estate tax laws. This information might be different or not applicable depending on your state, tax bracket, and/or other restrictions imposed by IRS. Please, consult with your accountant in your local area.