Rental Real Estate - Structuring & Tax Planning with Mark J. Kohler | CPA, Attorney

Welcome, everybody. We're live now. These are my two props. I'm wearing headphones to get in the mood and to prove that I'm hip and cool. And then I was also wearing glasses to try to help myself look smarter. But anyway, those props are done. We're ready to roll. Thanks for being here today. Got to keep it fun and entertaining. Thank you so much for watching. We're live on Facebook at Entrepreneur, also the Kohler Channel, and live on YouTube. We've got a lot of questions. We're here talking about real estate tax and legal structuring. It's hard to get a straight answer out there. There's a lot of misdirections, some confusion, people selling very elaborate structures, various spendy saying, oh, you can get as many entities as you want in the future for one flat price. I don't know. So I'm here for you. I want to make sure that you get the straight answer, the right answer, and an honest answer about how to structure your real estate and should you even be investing in real estate. So let me just say this. As an attorney, as a CPA in our law firm and accounting firm, I'll do probably 900 to 1,000 consultations in a given year. This year I'm slowing down a little bit on consultations, a lot to teach and train and manage my staff, but I'm in the office every day. But in these thousand consultations that I would have in a year on a regular basis, that's three or four a day, nothing over the top. I would see patterns. I would see examples of my clients that were really, really smart and successful and clients that were train wrecks and I was trying to help and everything in between. Well, let me just say this. I'm not kidding, honestly. And I think I was the biggest benefactor of seeing this and learning this. My successful clients, year after year, consultation after consultation, there was a common theme. They would have real estate in their portfolio. Would they would. And I'm not just talking about REITs in the stock market or you know, some sort of mutual fund that's focused on real estate. I'm talking about my successful clients have passive cash flow from some form of real estate. It could be nowadays Airbnb, VRBOs. It could be storage units, mobile homes, multi unit, four plexes, apartment buildings, single family homes, commercial buildings. Where does it stop, guys? Real estate is where wealthy people put their money. You know that. Let me just repeat it because you know it. Wealthy people park a lot of their money in real estate and that's what you should be doing. So I want to show the structure. We got a lot of questions already in the hopper. We're going to hit it. I'm going to rock and roll. We'll be here for 30, 45 minutes. You got a tax question, a legal question? I'm here for you. I do it every week. Next week I'll be out because I'll be doing my Chicago workshop live. Think there's only about 10 seats left. If you're in the Chicagoland area, want to fly in, come hang out? Cubs didn't make the playoffs. I know, but you can come out to Chicago for a full day workshop on Saturday the 12th. It's a couple hundred bucks. We're going to have Portello's for lunch. And I'm there with you all day with a workbook on how to build your business. You're going to love it. It's all me for a day. I'm going to make it interesting. So next week we will not be here live because I'm hitting the road to head to Chicago. So here's the structure. Let's just get structure out. Then we'll talk tax strategies and I'll start filling your question. We won't even be able to get through all of them. All right, here we go. You may just have a day job. That's great. You're in corporate America. You got a W2 and you're killing it. And you got a sweet FICO score. You want to park some of your money in real estate, I get it. That's cool. Some of you may be married. Both of you have a day job, W2, that's cool. Some of you may have a full time small business. You could be a sole proprietorship. You could be an llc. But if you're making money, you would have graduated to the S Corporation. And this S Corp is where you're going to be saving on self employment, tax taking, lots of write offs. This is not your real estate sign. If you're doing fix and flips, wholesaling, rehabs, turning property quick, you're going to run that through an S corp. But you're never going to put your rentals over here. This is money in, money out. You want to sue me, you can have my S corp. There's a laptop in it. Nothing. An S corp is a shell for channeling your ordinary income from a business. Now, if you have your day jobs, those are up here. But if you have an S corp, you've got a W2 down here. Now on the other side of this wall, this very important wall is where we're putting your passive income real estate. And that includes Airbnb and VRBO's. I know you, many of you, I've already seen some of the questions you want to say, well, where. What's a Airbnb vrbo? Do I owe self employment tax? Do I run it through an S corp? I'll just answer that right now. No. Over here we're going to have LLCs, and I don't know how many we're going to talk about that today. But these LLCs are what holds your rental properties, raw land, mobile homes, duplexes, all that real estate is over here. LLC. Do not save taxes. LLCs protect your assets. That's it. LLC's don't save taxes. Now if you have an LLC taxed as an S corp, all right, you just, you know, get out of jail free card. Your LLC is really an S corp now. But other than that, LLCs are for protecting our assets. So we're going to buy real estate over here, generate passive income that's typically tax free. We're going to have losses that we can use on our 1040. Generally there's some rules there. And I'm going to be building equity and future wealth. It's like the trifecta. I love it. Tax free, cash flow, equity tax losses. What could be better, you know? Alright, so this is what we're talking about today. Why are we building this? How are we structuring it? Some of you may have some short term questions. How do I get my kids involved on the payroll? Do I put my spouse on payroll? Hey, I want to fund a 401k with my rental real estate. How many LLCs do I need? Where do I set up my LLCs? We have could be here for three, four hours. I know because I love this topic and I'm a geek. So I'm going to just throw it open, let's see where we go. I got Anna Carina with a question. What do we got? How are games on flips taxed? Okay, so Anna Karina, if you're doing flips, I'm going to repeat that question. I don't think that came through. Anna Karina asked, how are gains on flips treated? So if you're a fan of Chip and Joanna down in Waco, Texas doing Fixer upper. I love Chip. He says stud. I got a get them on my podcast. So what Chip and Joanna doing are buying real estate and flipping it within 12 months. If you're A flipper and you got Property longer than 12 months, Something's wrong, there's a reason, right? But if you're doing it right, you're going to be buying and selling within six months. A typical fix and flip. Well if you do more than three a year or that's your primary occupation, there's different little definitions we could get into it. But if you're doing two, three, four of these a year and it's your primary deal, one of the two, it's going to be subject to self employment tax and we're it's going to be ordinary income and we're going to want to funnel the fix and flips and rehabs through an S corp. Now some people, you'll see it out there don't have their S corp is their parent company and they'll have a different LLC for every flip because they want to isolate the liability of these big projects. In some states that can be affordable. I'm still setting up an LLC with an operating agreement, stock certificates, minutes, articles, a tax ID number, a bank account. Just don't think that one sheet of paper on LegalZoom is going to get you covered. It's not. It will not protect you in a lawsuit. I've got case after case that proves it. You got to do the basics with the setup of an llc. But in some states it can be generally affordable to have an LLC for every fix and flip. But I'm not going to do that usually I'm just going to let the fix and flip be held by your S corp. We're going to buy it, fix it up, sell it. Ordinary income. Anna, Karina. We're going to do a W2A K1. We're going to get the 199A pass through deduction. We're going to save on self employment tax. Obamacare. We are off to the races. This is what every developer, fix and flip, contractor, electrician, plumber, we do. We're an S corp. The rental is over here, the rehab is over here. There we go. Next question. Mary, what do you got?

What is depreciation recapture and how do you calculate? Calculate it? Is it possible to avoid it? 1031 exchange.

That didn't sound like Mary. That sounded like a deep male voice. Are you sure that was Mary? Okay, anyway, that's Logan, one of our helpers on the set. You should have Logan ask the questions from the male. Guess in the late. I'm just joking. Okay, here we go. Depreciation recapture. What is that? Alright, so let's say you go out and buy a rental property. Oh, let's say you buy it for 100 grand. Now you're going to get to write this off every year under what's called the term depreciation. Now you might allocate 80 grand to the building and 20 grand to the land. Now we can't write off the land, we can only write off the building. And in a residential rental, we're going to do this over 27 and a half years. Now you could have put $1 down and got some seller to carry the paper or some bank. And you've got $100,000 mortgage, that's cool, you're still going to depreciate this. And you get to take that write off year after year. And by the time I do mortgage interest, property taxes, hoa, travel, dining, computers, Internet, cell phones, I got all sorts of write offs. Rental real estate will generally lose money on paper. I'm going to go through a four quadrant analysis here in a minute. Well, what do we do with that depreciation? Do we just get to save taxes with it? Yes, it's a time value of money. The IRS has given me a write off now, but when I sell the property, I got to give the write off back. That's called depreciation recapture. There's really only two ways to get out of it, maybe three. Number one, 1031 exchange. When you bump this property and sell it and buy another one of equal or greater value, you don't depreciation recapture, you push your gain into the next building. New cash flow, you hit reset, you're off to the races. That's a 1031. Got videos on YouTube about that. Chapters in my book. By the way, I'm going to be giving away a book today. For all of you that share this broadcast, we'll do a little drawing and I'll announce my winners from last week. Now the second way you can get out of it is with what's called a charitable remainder Trust. It's a crt. There's a lot of variations, but basically you give this property to a charity which you control, you get a tax write off and then the charity sells the property. Then you get a stream of income from the charity. Then at some point in the future, the charity gives the money or the trust gives the money to the charity. So you get this stream of income. It's a really. It sounds complex. It's not too bad. Just go to YouTube and type Mark Kohler, CRT Charitable Remainder Trust 5, 10 minute video. You can Learn about it. No depreciation, recapture. The third option is a way that we can kind of get out of it for the most part is called an opportunity zone strategy. They're hot and sexy. Right now, everybody's talking about opportunity zones where you sell this property or you sell stock or any sort of capital gain and go buy a property in an opportunity zone. If you hold it long enough, you can exclude any future gain from the sale of that property. Big topic again. Those are two or three ways, Mary. Look into it. Okay, now, before I take another question, sorry, Carly, Nancy, we're gonna come right back to you. You're next. By the way, I'm looking for question from, Let me see, Kelly. I'm going to call her Kelly D. I don't want to give her full name. If you see a question from Kelly D. You got to put it up to the top because I told her I'd answer it if she got in here. Okay, here's my four quadrant analysis. If you're a real estate investor, you should be able to do this in your sleep. I'm not kidding. When I teach workshop, I always do this. Even if you've seen it 10 times from me, I. I love it. It's always a good reminder to me of why we're looking at rental real estate. Everybody in the room here, too. I want you to be able to do this on the kitchen table for your aunt and uncle this weekend. Here it is. Why real estate? Now we got to get this out on the table as we start to do more of our tax and legal structuring. And I'm going to say this too, when I go give a lecture to the association of Plumbers or morticians or dentists or orthopedic surgeons. I always talk about real estate. I don't go to real estate conferences as the only place I talk about real estate. I talk about rental property everywhere I go. Because remember, where do my wealthy people put their money for the most part, in real estate? So that's why we're talking about this, okay? There's four benefits to rental real estate. I know some of you that know me have seen this before. Just do it in your head with me. We've got appreciation. We've got. I'm going to put up here, let's do mortgage reduction, mortgage reduction. Then we're going to do tax benefits and cash flow. Now, I know there's real estate experts out there that do little analyses just like this in different ways. And you want to know three or four ways to analyze real estate. So you always make your best decision. Bigger pockets. Those guys over there, I love them. I've been on their podcast. They take a little different approach at it. And then I've been on some others that take even a different approach. And it's all good. The bottom line is I want you analyzing rental properties three different ways till Sunday to make sure you make a good decision. Remember, you're not buying a cute little house with a white picket fence. You're buying numbers. If the numbers don't make sense, walk away. I don't care how cute it is, how wonderful the neighborhood is, or how sexy you think it is, or how it's going to grow in value. You buy property for cash flow, and it better make sense or get out of there. Okay, that's what we learned from the 0708 crashes, right, everybody? Okay, appreciation real quick. I buy a property for 100 grand and I put down 10,000. I get a mortgage for 90. So here's my down down payment, here's my mortgage. 90. I'm into this thing 10 grand now. Appreciation. Real estate, over time will appreciate. Will it go like this? Sure. It's going to go up and down, but you don't lose the dirt with a stock. You might. It's crazy. The stock markets a little more unpredictable that way. An individual stock could lose its value tomorrow. Real estate can go up and down, and it will. But over time, real estate has outperformed Wall Street. The average return on rental real estate over the last 50 years has been 6.74% across the board nationwide. So if I buy a property in it for 100 grand and it goes up, I'll say 5% a year for the next 10 years, it'll be worth 150 grand. It's going to go up every year. So 5% appreciation on the value. So it's going to go up five grand. Five percent appreciation. Well, what's my internal rate of return? How much should I make on my money? Look it, you only invested 10. The bank loaned you the other 90. This is OPM using other people's money. Not opium.

That.

That's illegal. But I'm talking opium. Other people's money. So If I invested 10 and made 5, what's my ROI in this section? 50%. I invested 10, I made 5. Tax free, tax deferred. I'm not going to pay tax on this. This year, my property is going to go up in value and I'm building equity. Quadrant one, quadrant two, mortgage reduction. Who's Paying the mortgage, are you? Oh no, you rented the property, you have a tenant paying the rent for you. And we want to make sure the tenant bare minimum, and I have clients that require a lot more, but bare minimum, I want the rent to cover piti. Piti. Now that's going to be the principal interest on the loan taxes, which is going to be property taxes and insurance. PITI insurance is the property insurance. Now if I want a little more than that, I want a cushion for vacancies, repairs, maintenance, HOA fees and all that. But if I can at least cover this, who's paying the mortgage? The tenant. The tenant is paying the mortgage. So if my mortgage is and is going down, let's say even 150, $175 a month, because a lot of it on this hundred thousand, $90,000 mortgage is going to be interesting at the beginning. My son was just complaining about that to me the other day. He's like, man, I bought a house, I've been paying mortgage payments for a year and a half. What the freak. It's all interest. Yeah, it's a lot of interest right off the bat. So $150, $175 a month might reduce the mortgage by $2,000 at the end of the year. Even though you paid a lot more for those mortgage payments that your tenant paid for you. So look what happened. The property went up in value here, the mortgage went down and you didn't put any more money in the property. The tenant paid the mortgage for you. So look at, you're building more equity. It went up by 5,000 and the mortgage went down by 2. That's a 20% ROI. You invested 10, you made 2. 20%. Alright, now I'm going to move quick through because we're just getting. I know there's a lot of questions, tax benefits. The average rental property will lose money, paper, even though it might cash flow. Because look at rent and say we're getting 8, $900 a month in rent times 12. You know, this might be $9,000 in rent during the year. Well, I've got to depreciate it. Remember, I'm going to write off depreciation, the big D. And I don't mean Dallas. That's a country song talking about divorce. Okay, Depreciation, mortgage interest, property taxes, travel, dining, home, office, Internet, computers, the kids, repairs, maintenance, tools. The average rental is going to lose money. On paper this year we're going to do over 5,000 rental properties on tax returns for our clients around the country. Do you Think we see trends. You bet. The average rental property is going to lose around $6,000 on paper. Now some people have a property paid off, they're paying taxes, they're just collecting rent, they're not investing. When you use leverage, you're going to generally have a mortgage interest deduction that will generate that loss on top of depreciation and everything else. So here's the bottom line. If I'm my tax return, I've got a $6,000 loss coming in on my tax return. And let's just do our little diagram here. I've got my day jobs, I've got my rentals and there's a $6,000 loss. That means on my tax return my taxable income went down by 6,000. If I'm in a 30% bracket, 25 fed 5 state that means I save 2,000 in taxes. Look it, lower taxable income, less tax, more refund. By buying a rental, I get tax benefits. That's why the rich do it. So if I can save 30% of 6,000, which is $2,000, what's my ROI? I invested 10, I made 2 grand in my pocket and saved taxes. That's a 20% ROI in this quadrant. Now last quadrant, let's say cash flow. Did you cash flow, 100 bucks. Do you pay taxes on that cash flow? No, that's tax free cash flow because here's your tax return minus depreciation of mortgage interest and blah blah blah. But you bought a rental and you have an extra hundred dollars in your pocket every month to pay for the sale. The cell phone bill that you're going to write off anyway. You weren't paying for your cell phone bill before, but now your rentals, paying for your cell phone bill, that is a rate of return. The cash flow is a rate. So if I can make 100 bucks a month, that's $1,000 a year. Let's say round it down, what's my ROI? I made $1,000 on a $10,000 investment to pay for my kids cell phone. That's helping me on the rental. That's a 10% rate of return. So here it is. Hear me out. 50, 60, 70, 80, 90, 100. My math worked out 100% rate of return on one simple little rental. This isn't even that aggressive. If you think it's too aggressive, let's cut it in half. 50% rate of return. Are you kidding me now? Are we going to get the same rate of return in every rental every year? No. Is there risk in rental property sure, if you got to learn about it and test the waters and make some mistakes. Been there, done that, still do. Rental property is not a guarantee. But if I can even make 50% rate return, give me half of that 25%. You outperform on Wall Street. Sure, let's try to do that in our retirement account. Yes, you can. So if I can get these rates of return in real estate, leveraging my money, why not? And remember, you don't have to be rich to do this. Some people are out there. Mark, I'm trying to buy my own house. Hey, maybe it's better to rent where you're at and invest. I've guessed on my podcast all the time. How can I buy rentals with crappy credit and no cash? I've got six people here in the room with me. Could we all put in a little money and buy a rental? Sure, maybe someone's got more money, but better credit. Someone knows where the rental is and they'll do all the management. You can form an LLC and create partners to help you buy a rental. Wouldn't 20% of a rental be better than no rental at all? My challenge to all of you. We'll get back to questions right now. Nancy, my request of all of you is to make the goal to buy one rental a year, or part thereof. Just make that goal, write it on a little index card and put it by your mirror in your bathroom. And every time you're brushing your teeth, you're going, I can do this. I'm going to build my credit. I'm going to get out of debt. I'm going to save my money and I'm going to buy a rental. And I can. Dave Ramsey. Yes, Dave Ramsey, hear me. Can use debt to do it. Because debt that makes me money is okay. Not all debt is evil. And I love Dave Ramsey. He's changed my life and he changes the lives of so many people. But frankly, I think he goes too far. Not all debt is bad. I can buy a rental property that makes me money. It's okay. Now, I'm not going to put a dollar down. I'm going to put down a substantial down payment and hedge against problems. And I'm going to buy. Last point. Going to buy rental property based on cash flow, not the hope of an appreciation, not for tax benefits. I'm going to buy a rental property that cash flows. Everything else is freaking cherry on the top. Can you feel it? There we go. Okay, Nancy, what's your question? Let's do it.

She says, thanks for how you are structuring my life. Recently I did a short sale on an LLC property. How will I need to report this on taxes?

Okay, Nancy did a short sale on a rental property, or I assume rental. You say rental. Just property.

LLC property.

Okay, so it's an LLC property. So she might have. Let's go over here to our diagram. She might have a property over here that she acquired and she short sale. That means she negotiated with the bank, got a lower mortgage and then she sold it and had a profit. It could have been her property. She could acquired it, who knows? Nancy, here's the easy answer. If you're in the business of short sailing and you've done more than I'm going to do it more than three, so four or more short sales during the year, you better funnel it through an S corp. If you're a pharmacist and you work full time as a pharmacist and you did a couple short sales during the year, capital gain and it could even be short term capital gain. No need for an S corp. See, if you're not doing enough transactions, you don't qualify as a dealer or real estate professional. Now some of you are like, well, I don't want to be a dealer professional. Sometimes I want you to be. Because if you've got a lot of losses from rentals, those losses can wipe out your income over here. So don't think that being a dealer is bad or being a real estate professional is always good. You got to look at each person's situation. So Nancy, I'd go through your tax return. I look at how many deals you're doing. Are you married, you have a day job, what are you doing? Your accountant should be able to explain it in 15 minutes and you make a plan for the year. Okay, next question. Okay, I know there's. Okay, just throw it out. Let's do it quick. Tell me your name.

TA TA TA okay, this one's long, so get ready.

Okay, just summarize it quick if you can.

Okay, she's from New Jersey. I'm about to buy my first investment property in the state of North Carolina. This is the way I'm going to set it up. And correct me if I'm wrong, she's going to set up as a partnership LLC in the state of New Jersey for management and then member managed North Carolina LLC and North Carolina LLC will be disregarded for tax purposes. Please correct me if I'm wrong.

TA TA that may be your initials. I'm just going to call her TA Ta, I hate to say this. Don't be offended. I think you're wrong on several fronts. And I'm going to save you money here, too. And I'm going to give you better protection. So let's just summarize. Ta. I don't know if she's got a day job, married, or small business. Frankly, I'm not going to worry about that. She's buying a rental property in New Jersey. Now, why do we set up an LLC in the first place? Now, let me ask you that, Ta. Am I doing this to save taxes? No. Do you get to still write off your depreciation, your mortgage interest, your travel when you go? Oh, sorry, I screwed that up. Right. Ta is down here in New Jersey, but her property is up here in North Carolina. So does she get to still write off her trips to North Carolina to check on her rental? Sure. Does she get right off her cell phone and home office and property management expense? Sure. Does she have to have an LLC to save taxes? No, I cannot say that enough. I say it from the rooftops. And some bozo out there is selling LLCs to save taxes. They're not doing your tax return, are they? They sell it and leave. Be careful. So Ta then says, well, I must need it for asset protection. Now, step one, I'm going to just assume, and I think Ta said this in her message, right? Logan, this is her first rental property. Ta, let's just do it simple and easy. Now, if I set up a New Jersey LLC notice. She knew this. She's got a register in North Carolina. Where? Or get a North Carolina llc. And she wants a two member llc. Whoa. Now you got to file a tax return. We charge at least a grand for a 1065 tax return. Any decent account is going to be that much. So now you've got an extra tax return. Two member LLC in New Jersey. You're not even doing business in New Jersey. See what I mean? So my recommendation for Ta on the phone, and this would be from any of my five attorneys consulting clients around the country, because we want you coming back, not getting ripped off. I'd set up a North Carolina llc. That's it. One LLC in North Carolina. And then I would deed the property over to the llc. And I'm not going to worry about the due on sale clause. I know someone's out there freaking out. Well, I got this loan from the bank under my own name. Yeah, and they've already sold your loan nine times in Wall Street. As long as you're making your mortgage Payment. There's never going to be a due on sale clause. In 20 years, over thousands and thousands of LLCs and transfers. I've only had one client where the bank threw a tissy fit and wanted them to put it back in their own name. And I swear, because they went in and asked permission and made a big fuss about it. Don't worry about it. Ta, get a North Carolina llc, do a deed transfer. You can use Mallory at my office, 150 bucks. She'll transfer the deed into your LLC. Even after the mortgage is all done, set and filed, the LLC will have its own tax ID number. Now, Ta said something else that was kind of not good. She goes, she's going to do a member managed llc. No, no, I want a manager managed llc. I want Ta to be the manager of the llc. That's public record. The ownership is private. No one knows. Don't do a member managed llc because if you change the membership, you've got to go file amendments with the state and everybody in the world knows who owns it. Want that to be private. I'm going to let you be the manager. I'm going to have mail forwarding into our digital mailbox where no one knows where you live. I want privacy. There are so many strategies here for camouflage as well as bulletproof vest. Now, nothing's bulletproof. I hate that word. But protection and privacy. So don't worry about the New Jersey llc. Just set up one in North Carolina. Call our office. Don't do it online either. And if someone's selling you this, you got a bad advisor. We charge 800 bucks. You get an hour with an attorney tailoring your tax return to the plan, answering all your questions. The little diagram done. Now, this is not an infomercial, but I want all you to know what the prices should be out there. You shouldn't pay more than that. Now, if it's an IRA llc, it could be a little bit more. If you have a bunch of partners and a bunch of negotiation, it could be more. But this should be a single member LLC in North Carolina. Manager managed. The end. Okay, Gary, what do we got?

When I buy a rental property, should I set up an LLC beforehand or just buy it personally and then switch it?

Gary, great question. And this is for Ta as well. Gary, you're going to close in your name, because you know Fannie Mae and Freddie Mac, they're freaking out, they're going through your FICO score and you're going to go sign on the loan. Close in your name. You're Going to get the best terms and the best loan. We all know it. Meanwhile, at the same time, Gary, Ta, any of you else out there, we're setting up your LLC at the same time. Then, when you close on the property, the skies open up, the stars align, and we transfer the property into your llc. Then, with your property management company or yourself, the tenant signs a lease agreement, the name of the llc. Meanwhile, you've set up a bank account for your llc. They pay the rent to the llc. Bank account. All they know is that Ta and Gary are the managers of the llc. We have privacy as to ownership and privacy as to your address. Off to the races. Gary and I would set up the LLC at the same time. Now, some people. Here's a caution. Some people say, mark, I'm setting up an LLC to go buy a rental in Florida. I go, do you have it under contract? No, I'm just shopping. Well, what happens? You find a property in Georgia, they're not stuck with a Florida llc. So, Gary, I really want you to be close to closing. You know, you're past the conditions phase, and it's eminent. You're going to buy this property. Call me. Let's set up the llc. Call me. All right, Ellie, what do we got? How come Carly is asking the questions for Gary and you're asking the questions for Ellie? This makes no sense. It totally throws off my mojo. Okay, okay, Ellie, we just got to keep your toes.

Okay, well, purchasing an investment property and having rental income and the benefits of the depreciation offset the income on the and lower taxes on active income.

Ellie, I am so glad you asked this question because we're going to take it to another level. Ellie said, mark, come on, look it, I've got my day job over here. Maybe I'm married or single. If I got to talk faster. Everybody's, like, moving along. Lots of questions. Okay, Ellie, she's got a rental property, and we did our four quadrants and she's got a loss. And she says, mark, are you sure that loss is deductible on my 1040? The answer is maybe. Want to be honest? There's three classifications. I talk about this for an entire chapter in my book. And I have many clients read it and go correct their CPA who jacked it up. I teach this class to CPAs around the country. I'm not kidding. You guys are learning some powerful stuff here. When you Ellie files her tax return, she's going to check the box one of three ways. One. Okay. Is she a real estate professional? No, no, sorry. Is she passive? Is she active or a real estate professional? This determines how she can write off the loss on her tax return. If she checks the box passive, she can only write off the losses against other passive income. That sucks. I don't want any of my clients there. Number two, if she checks the box active, you can write off all the losses, ellie, up to $25,000. But once your AGI adjusted gross income hits 150 grand, you lose them or do you lose them? Some of you accounts out there, does she lose them? No. If she's an active investor, which all my clients are, all you have to do is be a decision maker. No time requirement, no licensing. If she makes too much money, those losses go into a bucket. And Ellie, you want to capture those. I have some clients that go, yeah, I didn't track taking my kids to grandma's at Thanksgiving to work on the rental because you know, I make too much money, I don't get the write off anyway. I'm like, oh, you'll get the write off. Track it. It's just delayed gratification. Someday when you sell any of those rentals, you can dump out the bucket and take the losses. So Ellie, you're going to get the write off. So don't freak out, continue to track it and then you'll in the long run get it. Now the real estate professional is our last classification. If you are a real estate professional, you can take all these losses against any W2 or small business income. What? That's huge, right? That's good. Well, in order to do that, it's a two part test. A, you have to do 750 hours of real estate during the year. It's an average of about 13 a week. Two, your primary job has to primary occupation has to be in real estate. You can't have a W2 working for someone else. You either, but you don't have to be a realtor, that would help. But you just have to be doing real estate all, not all day long, but as your primary job. If you are a part time pharmacist, then you better be doing real estate 21 hours a week to show you do that more than being a pharmacist. So you got primary occupation. Now what's cool is if you qualify as a real estate professional, all these losses are right off you ready for the next level. If your spouse qualifies, you both qualify. So now my day job spouse has benefits and security. The other spouse runs the real estate business. So that's why I'M setting up a website called taxmatch.com and you can discuss your long walks on a beach and your AGI and your amount of rental property. I'm going to bring together real estate professionals and boring engineers into a perfect match made in heaven and tax return bliss. That's my goal in life. That's what I do. I just. Matchmaker, matchmaker, make me a match. Sorry, this is getting out of control. Okay, next question. What do we got? Gustavo, man. And I am a Breaking Bad fan. I will say that right now. I can't get Breaking Bad out of my head now.

Okay, this one's short. Mark, where's your Mountain Dew drink?

I know, this is disgusting. It's water. It's disgusting. I've already drinking two or three Mountain Dews today. And a rock star. So just keeping it real, people. Thanks, Gustavo. I love that. Okay, what do we got now? This is VA Samuel 07. Okay.

All right. He's from living in Texas. Should my family LLC be a Series LLC or should our primary LLC own a Series LLC?

Okay, now I'm hoping Vsamuel07 is when he graduated from high school or college and wasn't born in 07. Or else he's a 12 year old asking a question some of you should be asking. So I'm going to assume little older. Va Samuel. So he says he's in Texas, let's get it on the table. He throws out another strategy. And I love this one, people. How many LLCs should you have? VA Samuel is saying, oh, I'm down in Texas. Should I use a series llc? Okay, I'm doing this question and one more. Alright, okay. Now listen everybody, this is important. Everybody says how many LLC do I need? I've got four options ready. I could. Let's do it this way. This is your operations ordinary side. We're not going to worry about that. So I'm just expanding your passive side. All right? You could have one LLC and you could have three rentals in it and I could be like forgot her name already in New Jersey. I could have a New Jersey LLC registered in North Carolina and in Florida. So I could have an LLC registered in three states and have three different properties. Or I could have one LLC in each state or three LLCs in the same state with three different properties. Now what's the pros and cons here? The pro here is I've got one llc. Cheaper, easier, simpler. And I'm only maintaining one llc, possibly even one tax return if I go a two member route. But what's the con? All my eggs are in one basket. If this cute little rental that's just an adorable meth lab, it's going to have problems. You just know it is. Sometimes they call them drug dealers, I call them entrepreneurs. But they're in this little deal and they're having a hard time and the house blows up. Another Breaking Bad example. And so we've got all the rentals threatened because they're all in the same llc. Well, let's go to option two. So now I set up an LLC for every rental. That could be overkill. These could be three crappy little rentals and I could put all three in the same little llc. But if this is a golf course rental, this is an Airbnb VRBO ski in, ski out rental, and here's my meth lab rental. I'm going to want them in different buckets. Option 3. In some states you can have what's called a series llc. This is what VA Samuel brought up. You have one parent LLC and you can have as many baby subs as you want, no extra cost. Forget about a California, it doesn't work for you. But I can have a series LLC and have as many subs as I want. But one setup, one tax return, simpler and I get protection is if I had option two. Series LLCs are very affordable. So, va Samuel, what I'd say to you is how many rentals do you have? How many you're going to buy? If we only have two rentals and that's all you're going to do, I'd stick with option one or two. If you're going to buy five or ten rentals, I'm going to go option three. Now let me tell you what states allow for Series LLCs. I'm giving this book away. You can all go to Amazon right now or to my website, markjkohler.com buy the book. You can go to Amazon and buy it. And let me tell you, in the table in the back, I've got all sorts of tables, 28 game changing strategy chapters. It's really fun. Here's the states that are series LLCs. Alabama, Delaware, District Columbia, Illinois, Iowa, Kansas, Minnesota, Missouri, Montana, Nevada, North Dakota, Oklahoma, Tennessee, Texas, Utah and Wisconsin. If you're in any of those states I listed, then you can use option three. Now, just to make this very special for that person who's going to win this book by sharing this broadcast, I'm going to put a little smiley face here and say thank you for listening. So now this is for you, all you have to do is share this. And then Rosalie is going to draw someone's name in the morning and then she's going to email you and go, you won the book. And so it's here. Bam. I want you to make this your target for reading. Hit it. You got to do it. Okay. Fourth option. Now, I only bring fourth option into play when I have a client worth a million bucks or 10 or 20 rentals. But the sad thing is there's companies primarily out of Nevada selling this structure to freaking everybody. And it makes me mad and it hurts. It really does. But what we would do for my more advanced clients as we graduate up to it, which is fine. I set up a holding company in a charging order protection state. Whole chapter in my book. Go YouTube it cope. It's a Cope LLC. They're extra, extra protective and then very private. And I set up a cope LLC. I only charge 800 bucks for a cope. The cope owns other LLCs in other states and I can have all these baby LLCs with two layers of protection. I do that for my advanced clients. I usually set up my Copes in Wyoming. I can hide you there. Very affordable. Not using Nevada. Stay away. Alright, well, apparently I've got to wrap it up. I was having too much fun and got carried away. I definitely need to go get another diet due. Thanks Gustavo, for that reminder. Go out and share this now. I'm going to be in Chicago next Saturday on the 12th. Couple hundred bucks. Fly in. It's a tax write off. Come in. Come to the workshop. Only about 10 seats left and I got a newsletter at my site, markjkoler.com Go sign up for that please. On the YouTube channel hit the bell. Subscribe. And every time I shoot a new video, you get a ping so you know what's going on. And finally, if this is helpful at all, share it with your family, your friends, your business partners. A lot of people would appreciate this clear, straightforward tax and legal advice. I'll be here in two weeks. Until then, get my newsletter with many, many other videos and articles at my website and on YouTube. Thanks everybody. Keep leaving the dream.