Financial Statements Tax Filings and Audits for Securities Offerings

Hey, welcome George. Hey, thanks for coming to our podcast. We, we do these podcasts periodically when we have interesting guests that we want to share with our audience. And when I learned about you and your tech services, I was pretty impressed. And I thought that you were absolutely somebody that our audience needs to know about. That's why I thought we should do this podcast. Thanks for agreeing to do it.

Of course.

Yeah. Let me go ahead and just give a little intro for everybody else that will be listening to the call. This is Syndication Attorneys monthly podcast. The title of it is Raise Capital Legally. We also post our podcasts on all the different podcast platforms and on our YouTube channel. Our goal here is to introduce our audience to different services that they may need as their businesses grow. I'm attorney Kim Lisa Taylor. I'm the founder of Syndication Attorneys. And then before we get started, please note that the audio and video from this event will be posted on our podcast platform, YouTube channel, website, and social media, and will be made available to the public. So information discussed during this event is of a general educational nature and should not be construed as legal or tax advice. Since we have a tax advisor with us today. So yes, until we understand your specific facts, we can't possibly give you an answer that you could rely on. So just make sure that if you do have a specific legal question, that you schedule a call with one of us, and whether it's legal or tax, to make sure that you are getting appropriate advice for that. So George DeMott has joined us and we want to hear all about your company. George, tell us what you do.

Thank you. I appreciate you having me on. And actually, I think your field is very interesting. Syndications and raising money is one way that small businesses can survive or new ideas or new projects can be brought to life. So we see them in real estate, but we see them in all kinds of exciting things like technology and biotech. And we serve these exact type of clients, whether they're an investor, whether they're the general partner, Or the syndicator, doesn't— does not matter what level of the structure chart they're at. We can serve them from the tax advisory, the tax planning, the business structure planning, whether that's hand in hand with the entity's attorney, somebody such as yourself, or whether that's them just brainstorming before even creating the blueprint. We help with the initial structure all the way to the tax returns, the personal tax returns of the Limited partners or the general partner.

That's fantastic. Yes, and we do have both a real estate division and a business division. We have a business attorney that specifically does those other types of offerings. And structuring is always an issue because it depends on long-range goals for that, that kind of a business. Are they going to stay small? Are they going to stay privately owned?

Or are—

do they have plans to go public at some point in the future? And how we structure it now and set that up sets them up for future funding rounds and being able to execute those long-range plans without having to go back and kind of restructure midpoint, which can be awkward. And sometimes it kills a deal because you've got somebody in from the beginning and it's just not going to get out and they might not let you go forward the way you want to. So we want to make sure that we're always protecting against that. And of course, we're always giving the best tax savings possible to all of the participants. I love that you guys do that and can support our clients that do those things. We do also have a lot of real estate clients that are always looking for— we've been getting a lot of different structures lately. We have people who are doing Delaware statutory trusts. We're doing Regulation Crowdfunding offerings. We have people that are doing Regulation A+ offerings. They want to turn into a REIT. We did hire an international tax attorney so that we can now support cross-border structuring. And I understand that's also something that your firm can support, right? Is the international dealing with FIRPTA and all those things that, that relate to the international investors?

Absolutely. And to tie into what you were saying about the initial structuring, we can also help with brainstorming out the blocker entities that can be put in place in a fund structure, in a syndication structure. to prevent or to reduce any kind of international tax exposure.

That's fantastic. Yeah. And just so the audience knows, we are going to do next month an interview with our new tax attorney. So we're going to be talking to her about those specific things. With between her and George and the services he offers, that's going to be a really nice fit. And I can tell you that there are not very many people that do the international cross-border tax advice. We have looked for years to have CPA support for that. And we've tried a lot of different people over the years and just haven't had a good response. So I'm super excited that we ran into you guys.

Yeah. Yes. Thank you. Over the years, we just tried to hire the best of the best. And it does not matter in some cases what city or state they're in, but sometimes even what country. And we have a Canadian CPA that's on the team, been with us for many years. And we have an Irish chartered accountant that's been with us for years. We have an Australian. CPA. So you have a lot of cross-border work that happens, especially between the US and Canada, but UK is a, is also a major place where we have many clients. So this is something that we see all the time.

Yeah, and absolutely, we do have a client right now that's doing a limited partnership capital raise because they're Canadian and they may have some Canadian investors, but we have to structure, whether it's the investors that are coming in or whether it's the, the issuer, who wants to come in from another country, we always have to think about how can we protect them tax-wise? And that is always the central question, always. Secondary questions to that are how do they comply with securities laws in that country if it even has them? And then taxes. And then of course, worrying about money laundering issues is always a concern as well. So preferably, if you're going to raise money from investors outside the US, make sure you know who they are and make sure they're not using you for some illicit purpose because it's not them that goes to jail, it's you. All right, great. A little deviation there. All right, so how does Dimov Tax help companies that are raising capital?

Everything really from start to finish. You touched on it a little bit earlier in the conversation, but from the very initial structure, you want to have a conversation with your legal team and your tax team and your accounting team on what is going to be the best structure based on exactly, as you put it, your long-term plans. So if your long-term plans involve having limited partners in a partnership, then you would be structured as a partnership. If your long-term plans are to find angel investors, you're probably going to be a Delaware C corp. So this kind of brainstorming initially needs to be done. And then everything from the audits, if they need financial statement audits, depending on what state they are, there's different rules, there's different ways that we can participate. And if we're not doing the audit, we can do other things on the management side, such as bookkeeping or accounting. And then finally, you have your tax reporting. Now, tax reporting, remember, is backwards looking. So you want to have the right structure strategy in place so that your actual tax outcome matches your expectations and is something that you've accounted for far in advance, really, hopefully at the very beginning. And some of the things you probably do are for people that are early stage in the company. their 83 elections to ensure that they qualify for Section 1202, which can exclude up to, at this point, $15 million, I believe is the number. $15 million of capital gains can be excluded with that. So these are all things that need to be brainstormed right at the beginning. It will help with every level of that at the portfolio company level, all the way to the principals of the firm, all the way to the individual investors.

And I'm so glad that you help with the structuring because otherwise There's a big disconnect often between the attorneys are like, oh, just do it this way. And then you get to the tax portion of things and you're like, why in the world did you do it that way? And sometimes it's really hard to go back. I love that you guys are available to help with that beginning structuring, making sure that we're doing things the correct way. So what are some common tax mistakes you've seen syndicators make when it comes to setting up their offerings?

Choosing the wrong structure is a main one. Sometimes they'll create an S corp and then they realize later they need to have international investors or more than 100 people, or for whatever reason, it's just not the right one. Another common one is simply lack of planning surrounding options exercise. So I've seen companies where we were involved in the company from beginning all the way into capital raises in the 7 and 8 figures, where there were early-stage employees or executives that had non-qualified stock options. And they ended up with phantom income situations.

Oh.

So we've seen things like that happen. So these are just very common mistakes, but I'd say the most core one is exactly what you touched on earlier, is thinking about your business structure from a legal standpoint while not necessarily speaking with your attorneys or with your CPAs about what the tax outcomes can be in the long term from that structure. So I'd say that's probably the most common one. It's a very general one. But that's the most common one.

Yeah, the pass— the phantom income is real. And I got hit over the head with it in a really big way. I was working on a project, it was a joint venture, and we had a bunch of lots we were selling in a subdivision, and we thought that it would be a great idea to pay off the loan really quickly. And the IRS thought that was a great idea too, but they still wanted tax on all the gain for every sale that we made over the years. And there was one year where I owed $57,000 in taxes and had No distributions. So that was not a fun year. It was a, definitely a seminar learning experience. Yes. Having that tax planning upfront, even when you're doing just a, a real estate development project and understanding that you've got to make distributions on that profit, cuz those people are, your members are going to get taxed on that anyway, is something that a lot of people don't really think about. The other thing I've seen people do is structuring things as joint ventures. And can you talk a little bit about what would be the different With a typical syndicate, we have a manager-managed LLC. All the members are passive. We— is there— what happens to the tax structure? Do they still get the same tax benefits? Do the investors still get the same tax benefits as an active member as they would as a passive member?

That's a great question. So specifically in real estate has very different rules than other types of operating entities. For real estate, everybody wants to go for being able to take large cost segregation deductions or large loss deductions in the near term. Now, unless they're involved or are considered a qualified real estate professional, generally these type of losses are disallowed and they accumulate on their tax return. Now, they're not lost, but they sit on a form called Form 8582, and they're just there as passive unallowed losses which carry over year after year. Now one can say, okay, I'll just carry them over until I can use them to offset some type of a profit. But the profit must also come from a passive activity, such as maybe rental properties they own personally under their name or any other type of passive activity. Many people don't have that, so they end up with these losses that they can't use. Now, the one time that they can use them is when they've disposed themselves of the asset, when the structure gets disbanded. At that point, those losses are released. Now we know with inflation, $100,000 10 years ago is not the same as $100,000 now. So technically you're not losing that loss, but you might have lost the purchasing power, or in this case, the deduction power of that loss.

And if someone is active versus passive, does that change the nature of how they get taxed? Can they still take all those losses? Can they still not pay self-employment tax? just pay ordinary income tax from cash flow and then capital gains on sale. Is that still available to a joint venture partner?

So the people that are managing the partnership may have self-employment tax exposure. The people that are limited partners likely would not. On the limited partner side, if this is a strictly real estate syndicate, which have been exploding in popularity over the last 5, 10 years, If this is real estate, generally the treatment ends up on their own tax return and how they are classified is whether or not they're a real estate professional or not, and also whether or not they have offsetting income from other sources where that passive loss can be used.

But in a joint venture, according to SEC rules, every member has to be actively involved in generating their own profits. So then we're not using a manager-managed LLC, we're using a member-managed LLC. Does that affect their tax characterization?

If these people are actively involved in the management of the underlying activity, whatever that may be, then generally speaking, losses would flow properly through their tax return and they can take that deduction. But remember, if they ever get audited by the IRS, they need to be able to substantiate exactly what they're doing.

Okay. All right, excellent. All right. Yeah, we always want to avoid phantom income. We always want to make sure that we're putting not just the passive investors, we're absolutely taking care of them, making sure they have the best tax consequence, but also the management team. And sometimes when we structure a deal, we'll separate the fees that the manager will earn for their active role in management from their profit share and try to do that in a way that they're not getting attacked by the IRS who's saying, oh, all of your earnings are going to be taxed at the highest possible rate, giving the management team that profit share as if they were a passive investor in the deal. And I see a lot of people who don't do that and then maybe wind up down the road in an audit or in a fight with the IRS trying to distinguish, oh, this part should have been self-employment tax, this part was for something else, and we just want to put it— structure the deals in a way that you never even have that argument. Have you seen people that get into that situation?

Absolutely. I, and I have a question for you. It sounds like you've been structuring The management entity, because oftentimes in a fund structure you have your investments, okay? And oftentimes there's multiple portfolio entities. If this is a fund that's been going for a long period of time with one management team and multiple investors coming in and out and kind of a waterfall model that you have to keep track of from a fund administration standpoint, it sounds like from the— on the management— and I always think about this in the structure chart because I visualize it as little boxes. on the PowerPoint file is how I often get them from clients. So I usually see the management entity as one thing on the side. It sounds to me like you bifurcate types of income and then you have more than one type of entity as a flow-through entity of sorts. So yeah, that sounds really cool, or an aggregator entity. So tell me about that.

That sounds— Yeah, that's absolutely how we do it. We usually structure an asset management entity and that It earns all the fees, anything that could be taxed at ordinary income rates, anything that could be subject to self-employment tax, we put in that fee. And we always want to have that because a lot of people will come to us and say, we don't want to have any fees. And it's like, then the IRS is going to say, hey, you're getting some active earnings for something, so we'll just tax it all. So we want to separate it so the management entity and all of its members earn the fees. And then when we structured what we call Class B interests, which are the management profit share, Then we have the individual members of the management team take those interests. And so instead of, so then you end up getting K-1s from 2 different companies. So the issuer of the securities that sold the securities gives you the K-1 for your profit share interests. And then the management team is a separate entity. It is actually a non-member manager of the structures that we create where the investors are. Non-member manager, it gets a 1099. From that issuer, and then it has its own operating agreement. And so the K-1s flow down to its members from that. So that's kind of how we've always bifurcated it. And I'm sure there's other ways that people do it, but that seems to have worked for our clients.

That sounds really good.

Yeah. So, okay, bookkeeping. Yeah, that's always a big deal too, is how do people get bookkeeping? It sounds like you guys are able to provide that service, which is great because now you know that the books are in order at the end of the year, so there's no struggles with tax time and trying to get the bookkeeper to get stuff over to the, the tax attorney, or I mean to the CPAs. I love that you guys are doing that. That's fantastic. When you don't have the right books, it's very hard to get financing. And if your strategy is to buy something now, you got to have financials in order before you buy, and you've got to have them in order when you get ready to refinance as well. How important is it that things are set up correctly? What, what have you seen when it comes to that? When People do it wrong.

I'm glad you brought up financing. That's not even the first thing that came to my mind until you said it, because this is one of the things that kills financing and kills the deal because a deal wants to happen, right? So you have a seller that is maybe speaking with multiple suitors for that particular sale, and they'll go for the one that is able to provide the financing fastest to be able to accomplish the deal. That's why a lot of sellers of real estate specifically like a cash transaction because the cash is right there. So if you're going through financing already, they're a little bit bummed out. And then you have issues with financing such as not having one of the items. People reach out to this— us with this— as an emergency item all the time. Hey, I'm looking to buy a piece of property and it's always an emergency and it's always around March 30th when we're working 100-hour weeks. It's just always that combination and they're always the most important person in the room at that point. We always send emails and actually just reminded me, I should send an email to all my clients now. Saying, if you guys think that in the horizon you may have any type of purchase event that will require financing, remember, this is the checklist of items that you need to have ready for your banker or your loan originator, whatever mortgage company. And if you don't have that, you need to start working on that in advance because people reach out to us, it's an emergency, it's always a fire, and they can miss the investment.

Yeah, absolutely. I think that's So critical, and I'm glad that you guys are trying to be proactive about that and keep people thinking about that. Hey, you gotta plan ahead. You shouldn't be doing it at the last hour. Speaking of emergencies, we get a lot of emergency calls from people who are using the wrong CPAs to try to do their group investment tax returns. Often it usually happens when somebody is, oh, I've used the same person forever. They've done my personal tax returns and here I just gave them this and they don't even understand that there is an operating agreement, that they have to look at the operating agreement to see how different members are going to be classified and how they're going to be taxed and what the rules are that they're operating under within their own governing structure. And a lot of times that can't, it's just like the only thing you can do is fire that person, file an extension, and find somebody else. So I get a lot of those calls around, and I'm sure you do too, around the tax time and within a week or two of the tax deadline saying, oh, My CPA just told me we sold the property, and since we own 30% of it, we're going to get taxed on 30% of all of the proceeds from the sale no matter what. And it's, oh my gosh, how do you fix that? What I think my message there is, you've got to use somebody that understands this. Clearly, Dimoff Tax and George and his team have a very deep understanding of this. So if you are contemplating using your personal income tax preparer to help you with your group investment or your syndicate, you really want to kind of rethink that and keep them to do your own personal taxes. You still need that, but you really need somebody that understands these group investments in order to be able to help you with your, your fund or your syndicate tax returns. So awesome.

I would even take that a step further and say that sometimes it makes sense to have, to have the same firm Go through your holistic and comprehensive tax plan, business investments and personal in one place. And I'd say, and we have a financial advisory side of my firm as well. So have really your legal team, your investment team, and your tax team brainstorm with you on one call what the overall framework is going to be, and then have breakout calls after that to go through and make sure that each portion of your planning is ironed out. And to do this in advance, because things that could be happening on the personal side can affect what you should do on the business side if you have control over the entity, and vice versa. So I always recommend have— and even if you're going to use a different preparer, that's fine if it's just some basic K-1s and W-2s and 1099s— but at least have a plan that everybody's on board with, and that individual tax preparer Yeah, that's absolutely critical.

All right. We always get questions, especially when people are doing 506 offerings and they're including non-accredited investors. There are some additional financial reporting requirements for those. What kind of financial statements should somebody in that position be preparing and providing on an annual and quarterly basis?

Yeah, so, you know, the first thing is, So generally speaking, I believe the cutoff number was, and many years ago I sat for the Series 7, 63, and 65 exams, but this is probably 20 years ago at this point. But the general rule, I believe, was if you have up to 35 non-accredited investors, I believe was the rule, then you fall under this threshold with the SEC where you're simply providing to the SEC. And I don't even believe you're registering with FINRA. I believe you're only providing to the SEC simply a notification that you are raising funds. Now, on a practical sense, most investors actually do want to see either audited, reviewed, or compiled financials if they're financially sophisticated. Some funds, some higher-tier investors, and some governments are not even going to invest or consider the entity unless they see audited financial statements. So we see this everywhere. We don't only see this By the way, in raises of companies, we see this when we're working with nonprofits exceeding a certain threshold of government funds, that government entity wants to see the audit. So although they might not have any specific requirement on one side, the person with the money, the lender, the investor, the grantor wants to see it. So—

That's—

I'd say the larger it is typically, and the more people involved and the higher tier of people involved, you're going to have more asks for something. A little bit better than just, here's our QuickBooks report.

Yeah. And then typically they're going to be including what, even if they're doing their own bookkeeping, they're going to have to do what, a balance sheet? What else do they need to require?

Typically, if they're using GAAP or any type of regular accrual financial statements, you'll have a profit and loss statement. Okay. Otherwise known as an income statement. You'll have a balance sheet. Otherwise known as a statement of assets, debt, and retained earnings. And oftentimes they also have a statement of owner's equity or a statement of retained earnings would show changes in that. And really you want to have a cash flow report that shows the changes in cash balance. Essentially it's a reconciliation between your beginning and your ending cash. So those are the most common reports, but the mo— the 3 most common are going to be your income statement, your balance sheet, and your statement of cash flows.

And that's really helpful. So if anybody is listening to this and going, I don't know what these things are, you better be calling George. So call now, get it sorted out, get somebody doing your bookkeeping so that you can produce these statements when you need them versus trying to struggle and do it internally with your own QuickBooks software. It's just, it can be just a nightmare. And I've learned in the course of my business years that the thing, when I try to do things that are outside my wheelhouse, it's hard. It's a lot better to leave that to the professionals that know how to do it. And then I don't have to worry about it. I don't have to struggle. I don't have to do, spend all the time trying to learn how to do somebody else's job. Awesome. So can you talk a little bit about how fund accounting is different from a single asset syndicate or a business offering?

Usually a single asset, if we'll talk about fund accounting, first of all, fund accounting assumes that there is a fund and the fund has invested in something. Oftentimes a fund invests in multiple projects, which are called portfolio companies. Usually those are structured as separate LLCs or separate business structures of their own. So there is often a bookkeeper or accountant that handles the accounting of that operating entity. So while you have a large fund, one of the investments may be a series of bakeries. Okay. And that series of bakeries will have its own internal accounting. Now that flows into what we call fund accounting. Now fund accounting, that's going to include your state, your PCAP statements, which are your partner's capital statements. For everybody who's invested, they're going to see their proportionate income or loss of their investment. And in order to do that, you have this big complex spreadsheet and there's software that does this that has each investor's share, what, when they came in, when they came out, and what portion, what percentage of the investment they held in that time. And that ends up in their partner's capital statement. And as you mentioned earlier, they'll receive K-1s and sometimes they might receive multiple K-1s if they're invested in multiple funds that are structured as multiple limited partnerships. So that's a little bit about the difference. In one single investment, you're going to have bookkeeping for— let's say you're invested in one restaurant, you'll have bookkeeping for that restaurant. And generally speaking, that should flow proportionally into your investment's P&L and into your partner's capital and your K-1s. And now if you have multiple, then you need essentially a fund accounting, otherwise a fund administrator. So that's the overall— Difference is just a difference of complexity.

And just so I know, somebody's going to ask this, and I know this is ancillary to what you do, but I think you probably work with a lot of fund administrators. Could you just kind of broad overview of what should a fund administrator do that a CPA doesn't do?

So a fund administrator oftentimes is an entity used to separate the responsibility of the accounting and Many times investors actually want to see a big name fund accountant. So there are a few firms out there that provide fund accounting that are well respected, and investors like to see that because they trust the fund accounting provided there. Okay. It's also a little bit of risk shifting and liability— pardon me, liability risk shifting onto the fund administrator for mistakes. Your operators say, okay, we have this big name working on this and These are the financials that we can expect there. And the K-1s coming through will reflect oftentimes what's on the partner's capital statements there. So I'd say really make sure that with fund accounting, the, you've selected somebody that your investors respect and that your investors are fine with. Also on the fund side, on the fund manager side, it's a good deduction for them too, because it's a way that they can deduct this expense versus having to justify to their investors why they have this huge team internally.

Yeah. And the way I view it, and you can correct me if I'm wrong about this, is that they're the liaison between the fund manager and their CPA. And whether the CPA is going to be helping them with their just general income statements, or if they're going to be doing audits, those kinds of things, then that fund administrator is going to be the one that making, is making sure that all of that, all of those pieces are in place. So that there aren't any emergencies come tax time, but they're also going to be perhaps in some cases communicating with the investors. They're going to be the ones calculating the distribution, sending out the checks, and making sure that the investors are timely getting their tax return information and all of that as well. Is that your experience? Is kind of how fund administrator works?

So you brought up a really good point. So in the simplest definition, I would define a fund administrator as a fancy outsourced bookkeeper. And usually the, in a big fund, the fancy outsourced bookkeeper is the fund administrator that does the accounting. Okay. And then you actually have a separate firm, which is usually one of the Big 4 or top 20 firms that does the financial statement audit and the tax for that fund issuing the K-1s. So usually the company that does the audit also does the tax and is separate from the company that is the fund administrator, which does the bookkeeping. And this separation—

Right.

In the accounting industry is known as independence. And the reason for that is because the— generally speaking, you don't want to have the same company auditing their own bookkeeping, because the purpose of an audit is a third-party independent financial statement audit or financial statement review of what? Of management's books. And management's books under that definition are the fund accountant, because those are who the management company has decided to hire to provide the books. So that's really your division. Your main division is going to be the fund accountant is your fancy bookkeeper that's outsourced and your audit and taxes are done by the CPA firm that is doing the business accounting and audit for the management company and the fund.

So we do a lot of series offerings for clients who are going to be out. They really kind of want to create a fund structure, but yet they have a sense that they're going to have certain investors that want to be isolated into certain investment opportunities. So we've done a lot of deals where we've set up a master LLC structure, usually Delaware, Wyoming. There's a handful of states that require or that allow them. And, and then we'll do title holding entities. So it really can be used in any state because the title holding entity is always formed in the state where the property's located. So there's no issues there. It's just a matter of who owns that title holding entity. And we can isolate that as a series of one of these master series LLCs. In that case, when we have separate investors in a separate series and a separate investment opportunity, we've always suggested that our clients should be using separate bookkeeping for each series. How do you do that? Separate bookkeeping and maybe even separate tax returns. How do you guys handle those things?

Typically what I see is since each of these series is created as a separate legal entity, as you said, to protect the whole from any issue happening with one of the other entities. Usually these are separate business entities and therefore, especially with a group of investors, they're going to be arranged as a, what we call a 1065 tax return, otherwise known as a partnership tax return. So these will file their own separate tax returns and each person that's invested will receive their own individual K-1 for their proportionate interest in the activity of that partnership. If you have multiple of them and one investor is invested in multiple of these series, Mm-hmm. within that group that you guys are designing, then they will receive multiple K-1s.

Got it. Okay, so really you're just treat— and we're treating them all as separate securities offerings as well. So we're doing separate Form D filings, separate Blue Sky filings for each one. So it's really just a way to not have to keep repeating the same large PPM, a master operating agreement. We put all the common terms into the master docs and then the series docs are quite short because really there we only have to talk about the specifics for that deal. What is, what kind of, what are you buying? What are the fee structure? What is the waterfall? And what are your exit strategies? All that stuff can be isolated at the series level. And the other reason that our clients like them is because there's complete statutory separation of liability between each series. So the statutes in the states that allow the series LLCs actually say no cross-liability between series, no cross-liability between the master and the series. As long as the separate books and records are maintained. So super important that everybody understands that it's not really the same as the blind pool fund structure we were discussing before, where you have one pooled entity with all the investors in one place, and then you have a separate title holding entity for each thing, still keeping books at the title holding entity, but the cash all flows up to the fund, and from there it gets dispersed to the management team for its fees and to the members for their profit share. So that, that's a, a really great structure. I think it was originally designed for people who wanted to just have one entity and then go out and buy multiple properties for themselves that they were going to own on the, on their own. But we've just started to see a lot of application of it in the syndication world. And a lot of our clients just love the structure because it just streamlines getting those series docs done. And the costs, of course, are practically half of what you would pay if you were going to syndicate each one separately. It's been very popular, so I'm glad that you guys can support that. Here's another question. How about tenant in common structures? Is there some specific, have you dealt with that or are there some specific accounting where do you do accounting for each individual owner or does the tenant in common structure as a whole do some kind of an accounting?

And just to go back real quick, just to highlight something that you mentioned in the previous, when you were speaking previously about the series LLCs, I just had one more comment about that and This is actually a question for you based on my memory. Before we talk about tenants in common, based on my memory, the series LLC was created to simplify things like what you mentioned on a state level. And I believe it started as a state option before it— and I don't— series LLCs, as far as I know, are not even mentioned anywhere in the actual IRS federal code. So this started as a state thing, and I just found it interesting how you said that it developed. It started as one idea is to help individual investors, and it developed into now essentially its own animal in a way to syndicate deals that we're seeing just a lot more. Now, the tenants in common, really, this is just going to— a lot of this is a state-specific type of thing. And just to go back to your practice, How do you typically structure these? Do you create usually a certain type of entity that you apply for an EIN? How do you normally treat each one of these individuals from kind of the legal structure?

They're all separately, they have separate deeded interests. The reason that a lot of our clients want to do the 1031 exchange is they've sold something, they're trying to, they've put it with a 1031 accommodator, all their profits and their earnings, and they want to use the 1031 exchange rules in order to defer tax benefits from that prior sale. Into a new property. So let's say we have somebody who has a commercial property; they might syndicate a portion of it. Maybe they need to raise five million dollars. They think they can raise two or three million dollars on their own, but then they bring in another couple of ten thirty one investors who can take separately titled deeded interests in that property individually. So it ends up with the syndicate is one tenant and common owner, plus you got two other people who are coming in maybe with some ten thirty one exchange money. And they're all 3 going to be named independently on title for their percentage ownership share.

In other words, this is something that you put together on the title of the ownership of the real estate asset rather than a specific type of business entity that—

That's right.

Okay. Yeah. So we see these all the time and essentially you have to proportionally accrue the amount of interest per partner, unofficial— using the term partner, but unofficially For intents and purposes, from a tax standpoint, if somebody has a 20% beneficial ownership or participation in this tenancy that you've created here, then that's what they would put on their Schedule E. So Schedule E is where you report personal tax obligation for things having to do with rental activity or passive things such as K-1s or royalties. So yes, this will be proportionally shown on the Schedule E of the individual taxpayer.

Okay. So what, if any of you want to kind of research tenants in common, what it does, we've got some articles about it on our website. Just go into our search bar and put in 1031. You'll see those articles that talk about kind of what the rules are. There's also IRS has Revenue Procedure 2002-22 that says what all the rules are for making sure that tenant in common ownership does not get reclassified as a partnership, which would disallow the tax deferral. Just if you have any questions about that, we're happy to help with those. We do a lot of tenant in common deals. Just be aware of what the rules are and then you'll be fine. What about Delaware statutory trusts? Do you guys support those or have you ever had to work with anybody doing any?

So our consulting team often gets asked this question. This is something that became all the rage in some ways, probably over the last 5 to 7 years. That's when it started coming up as a topic. So absolutely. And there are various types of— we also see other types of nonprofit entities being created to hold income-producing assets or to hold investments. So these are all very new, and I'm glad that you've jumped on that wave. Maybe tell me a little bit about how you guys support that and what you guys have been seeing on this trend.

Yeah, so it's just yet another way that somebody with some cash that They've earned from a prior real estate property can 1031 exchange, use the 1031 exchange into beneficial ownerships in a group structure. So instead of going the tenant in common route, which, which does limit that you, so the, the real issue with the tenant in common is let's say somebody is syndicating part of the deal, they're only going to get their share of profits and their share of the asset management fees from their syndicate. Now they can do an asset management agreement with all of the tenant in common owners so they can still get fees from the whole group, but they don't get profit share specifically per IRS rules from the other tenant in common owners who are coming in with their own investment dollars. So that's where the downfall is for syndicators who want to do the— bring in these 1031 investors. So the alternative is a Delaware statutory trust, which does allow individual owners who've sold properties to take Income and to put that into beneficial owners, ownership interests in a trust that this Delaware statutory trust, which will still then let them qualify for 1031 exchange with respect to those interests. But now it is in a group structure and we can structure promote for the management team. There's some rules, there's something called the 7 deadly sins of a DST. So if anybody wants to do that structure, You need to look at that. And that, and it's a little more complex to create because some of the rules are you can't, that the beneficial owners cannot participate in any way in management. They, the property manager has to be voted on once a year and retained. There's just, there's just a whole lot of rules that you have to follow. And it's not really good for people who are doing value-add properties. It's really designed for people who are doing triple net leases where there's not much work to be done at the property. Or any refinancing purchase anticipated. Just again, if you want to look, there's articles on our website about it. You can look up Delaware Statutory Trust or DST and, and read those articles as well. Here's another one. Okay. So I'm hitting George with all these questions that were not on our question list. I love the fact that he's just taking it in stride and just whatever, answer the question. Do you know anything about the Opportunity Zone benefits that were extended under the One Big Beautiful Bill? So we've recently gotten some questions from people that have wanted to take advantage of that. And is that something your team would be able to support, whether you do it now or something you could easily figure out?

Yes, this is something that's been available for, I believe, since the Tax Cuts and Jobs Act of 2017, which was made effective on January 1st, 2018. At the time I was working one-on-one with many clients that had an interest in this and this kind of Like what you mentioned on the Delaware statutory trust being used as essentially a way to find a replacement property for a 1031 exchange in order to minimize capital gains. In the same sense, this idea of investing in a qualified opportunity zone essentially is the government's way to give you a tax incentive of investing in certain areas that they think would be great for investment. And so these are urban blighted areas, but there is a list of them and you can go on Google and find the list of those places. There are also investments that are being packaged and sold by your typical companies. I believe Morgan Stanley had one many years ago where you can essentially invest in that and be able to receive the benefits. Now, the big beautiful tax bill, I believe, had some updates that made the exclusion amounts larger, I believe, and extended some of the previous provisions. From what I recall. But the last article that I saw on it did mention that the list of available opportunity zones has shrank. However, it's, it, this is still an option. There is a holding period. I believe it's a 5 or 10-year holding period that your investment needs to be held and it needs to fall into those geographical areas that have been considered qualified for that.

Yeah. And what I just read about it the other day is that actually the big, beautiful bill allowed the governors, the states to start designating new opportunity zones. We may see that pool start to grow again. Again, every time there's a new rule, there's always rules. There's a rule that allows you to do something new and cool, but there's also some rules on that you have to follow in order to be able to do it. We'll, we'll be writing an article about that very shortly about the new opportunity zone rules and how you can use them. Again, what's cool about this is that you can get those 1031 investors, those people that have sold property, And in the Opportunity Zone context, at least the way it was before, you didn't have to reinvest the principal. You only had to reinvest the gain. So we'll have to verify that's still the case in the new rules. But if that's available, then that can, that's going to be very attractive to a lot of people that have sold property, don't really want to reinvest the whole amount into something new, but want to take that gain and still have that some deferral options on that gain. I think we're going to start seeing more about that. This new rules take effect January 1st, 2027. So if you're not aware of them, get familiar with them. Some, it works really well for development projects. That's what it was designed for, is to come in and, and to add value, create new opportunities and new buildings in some blighted areas, try to revitalize those areas. So it's not good for a value-add strategy because you're usually not going to be investing that much money into the improvements itself. And that would qualify for the Opportunity Zone rules. But if you say buy a parcel and you have an opportunity to build a second building there, you may be able to do that. Just be aware that's going to be available to you and you're going to want to know about it. We have picked George's brains for a long time here. He probably needs to go take a nap. I'm fine.

I can do this all day.

I love it. Yeah. And that's how I do it too, is that we just keep Telling people to keep trying to help people all day long. Tell us, how should people reach out to you if they want to know more about the services that you provide and how they could work with you? Where would you like them to go?

I'd say if anybody has a specific question about any of the topics covered, obviously they should mention that they saw this podcast and have their questions sent over to our— you can find our web form on our website, or they can call in. using our phone number on our website, which will be shared somewhere over here. But if you just look on the internet for George Dimov CPA, that's D as in David, I, M as in Mary, O, V as in Victor, CPA, you'll find my website and anybody can reach out there. And yes, specify your question there and we'll be happy to help. And I'm sure the same thing applies for you on your website.

That's right. And the same with us. If you want to schedule a call with us, you want to talk about any of these things, go to syndicationattorneys.com. And schedule a call button. If you wanna make sure that you talk to me, you can schedule a paid consult. Otherwise you can schedule a free consult. You may get me, but you might get somebody else. All right. I love what we talked about today. And for any of you that think, hey, taxes and securities laws are boring, I think that you must all agree that this was not a boring conversation. I enjoyed it very much. And George, I thank you so much for coming.

Thank you.

Thank you.