RE investing mechanics

[mistymoney]

Wanted to pick your brains about advantages/disadvanges of RE investing in in terms of pros and cons of the process rather than a focus on returns. I have vague info on how it works to your advantage.

Money
So - you have expenses, and rents, and depreciation. If the rents-expenses is positive, but adding in depreciation is negative - can you subtract that from your W2 income? How much? is there a limit of years, like when the IRS determines a business is a hobby because you lost money on it for years?


Liability
People getting injured or worse on the property and suing, neighbors suing, people walking past the property and slipping and suing....How well does the regular insurance cover this? with income property is adding umbrella really a requirement?


LLC?
is putting properties into an LLC a good idea? I had thought this was the best way to limit liability or am I misthinking?
How does money work - would you take money as a salary for admin work? Could the LLC have a separate bank account for everything so you could keep any profit there? How does tax filing work? Assuming this would mean you could not take a loss against your W2 income unless you put some money from salary into the LLC? Or could you even take that off your taxes?
How does this work after you die, how does the property or LLC go to heirs and would this be a problem for them?

Whatesle would you consider pro/con about investment RE? In terms of renting out home/apt to others - not commercial.

Sidebar! Bare or wooded land....has anyone just bought up tracts of land as an investment? Assuming aside from purchase price and insurance/tax cost is minimal. And that insurance/tax would itself be minimal.

[Telecaster]

Money - You almost never have W2 income as a landlord.   Yes, expenses are deductible.   As for the rest of it, it highly recommend buying this book and reading it. It is important to have a clear knowledge of real estate taxes from the beginning:


https://store.nolo.com/products/every-landlords-tax-deduction-guide-dell.html?_gl=1*jodl6w*_ga*NzA5MDQ0Mzc0LjE3MDQwNTQzNDA.*_ga_RJLCGB9QZ9*MTcwNDU3MDIyMC4yLjEuMTcwNDU3MTQzMS41Mi4wLjA.

RE:  Bare land.  I'm not a fan of real estate that doesn't flow cash.   

[mistymoney]

Money - You almost never have W2 income as a landlord.   Yes, expenses are deductible.   As for the rest of it, it highly recommend buying this book and reading it. It is important to have a clear knowledge of real estate taxes from the beginning:


https://store.nolo.com/products/every-landlords-tax-deduction-guide-dell.html?_gl=1*jodl6w*_ga*NzA5MDQ0Mzc0LjE3MDQwNTQzNDA.*_ga_RJLCGB9QZ9*MTcwNDU3MDIyMC4yLjEuMTcwNDU3MTQzMS41Mi4wLjA.

RE:  Bare land.  I'm not a fan of real estate that doesn't flow cash.

I meant from a regular job? Not sure what you are speaking too? I'm sure landlords have jobs too?

[Telecaster]

Oh, I see what you are saying.  I thought you meant deductions against the income of the property.  Yes, if you are filing as a sole proprietor then you can place those deductions against your income.

[maizefolk]

LLC?
is putting properties into an LLC a good idea? I had thought this was the best way to limit liability or am I misthinking?
How does money work - would you take money as a salary for admin work? Could the LLC have a separate bank account for everything so you could keep any profit there? How does tax filing work? Assuming this would mean you could not take a loss against your W2 income unless you put some money from salary into the LLC? Or could you even take that off your taxes?
How does this work after you die, how does the property or LLC go to heirs and would this be a problem for them?

Typically an LLC being used to limit liability for real estate investments would be treated as a pass through entity for tax purposes. So the losses (or income) of the LLC would flow through to your personal tax return rather than you needing to file a separate return.

You'd want to handle the ownership of the LLC in your will, but there's no barrier to heirs inheriting the ownership of an existing LLC.

[nouseforausername]

Just seeing this thread.

LLC / Holding Raw Land in a Business Organization: A couple points here. Some jurisdictions don't allow LLCs or other Secretary of State registered business organizations to be represented by a non attorney in court. That's a nasty surprise for a person holding raw land via an LLC and has a random issue pop up (e.g. wanting to sue a surveyor for not performing work, etc.) and suddenly there's no DIY legal option.

Also, although not necessarily difficult -- you need to maintain the LLC (file annual reports, pay the registration dues) to enjoy the benefits of it. That's really not hard, but I see a lot of administratively dissolved LLCs where obviously someone's CPA or lawyer just told them to form one for whatever activity and they never kept it up. It's a yearly chore.

Lastly, in the jurisdiction where I've been involved in raw land ownership -- the property tax rate is much, much higher for undeveloped land. It makes sense -- the local govt. figures that they can earn more off out of state real estate developers who don't vote there anyway. We actually pay less taxes now that we have a house on the lot than we did when the lot was unimproved.

[SeattleCPA]

FWIW, I think most LLCs owned by one person are disregarded entities for tax purposes. That means you ignore the LLC and just report its income and deductions on the LLC member's tax return.

Also counter to what @nouseforausername says, back when I taught the "Choice of Entity: LLC vs. S corporation" class in GGU's masters in taxation program, the attorneys who also taught that class always generalized that as compared to a traditional corporation, one attraction of the LLC option? It was way easier administratively. You didn't necessarily need to do anything other than pay an annual fee.

FWIW, I don't see people have too much trouble with LLCs. Corporations or LLCs treated as corporations? Yeah, that can become more complicated.

P.S. If you do set up an LLC, remember that you need to pretty quickly deal with the "beneficial ownership information report" the "Financial Crimes Enforcement Network," aka FinCEN, now requires. More info here: https://nelson.cpa/small-business-boir-filing-tips/

[nouseforausername]

Also counter to what @nouseforausername says, back when I taught the "Choice of Entity: LLC vs. S corporation" class in GGU's masters in taxation program, the attorneys who also taught that class always generalized that as compared to a traditional corporation, one attraction of the LLC option? It was way easier administratively. You didn't necessarily need to do anything other than pay an annual fee.

Love your posts, long time reader. Let's use California as an example... the LLC's member will need to file a Statement of Information biannually and pay the admin fee in order to remain active and in good standing. Failure to do so administratively dissolves the LLC and defeats one of the OP's original purposes -- liability protection related to the ownership of raw land, viz, avoiding personal liability.

So, is it hard to maintain an LLC? Absolutely not.  Is it more administratively burdensome than maintaining a corporation? Meh, I didn't think OP was considering electing a corporate form v. LLC?

Regardless of how hard or easy it is... I see a massive amount of administratively dissolved LLCs where the originator / member still carries out the underlying business activity , just without liability protection since they didn't file an e-piece of e-paper.