What You Missed January 2018 General Meeting
by Rob Earhart
Total Wealth Protection
William R. Noll, Esquire, CPA
January 2, 2018
“My primary objective is for you to understand enough of what your advisors are really telling you. I want you to be the captain of the ship, not the first mate,” proclaimed Bill.
“You can ask questions, but do not start them with ‘my attorney, my CPA, etc. said,’” he warned.
I want to talk about asset protection. We’ll give you the legal forms you need to protect yourself from vultures.
“Why listen to Bill?” he asked. “I am a CPA, a lawyer, an investor, and a landlord. I became a partner in a legal defense practice, and I now specialize in asset protection and tax savings.”
“My good friend, Al Aiello, used to do these talks until he passed away, so I am carrying on his programs.”
Saturday, I will be talking about the new tax changes but, for now, some of the new real estate tax changes are: the vacation home deduction is limited to $750,000; there are no changes to the classification of investor/dealer or depreciation segmentation; and rental income is not subject to self-employment taxes.
The overall tax changes will not affect the way the systems work as Al taught for 20 years and as I am teaching now.
“A lawsuit is an allegation of something wrong.” There are thousands of lawsuits filed every day. If you have accumulated any real estate for any amount of time, you are a target.
Bill started with a little story: “A doctor friend of mine was having a million-dollar home renovated, so he rented a small home for a while. When he came home one day, a large limb fell and paralyzed him. He could no longer do surgery and his million-dollar income went down drastically.” That investor had a large lawsuit and lost everything.
Real estate is a high-risk type of investment. No one trips and falls over a stock. In real estate, you are dealing with equity growing so you become a better target. Insurance does not protect you from tenant issues like appliances not working or causing danger.
Insurance does not protect you from environmental problems like buried tanks, etc. It also does not protect you when the claim is over the limits of the insurance. Even too much insurance can make you a target.
We’ll show you how to set up a legal LLC for ultimate protection. How is it treated for tax purposes? LLC’s are state-issued entities, so you still have to deal with the IRS. If you have a single-member LLC, it’s treated as a disregarded entity; taxes are filed on the owner’s tax form.
A multi-member LLC is treated as a partnership, unless elected to be treated as a “C” corp or an “S” corp. LLC’s give you liability protection and are not as complicated in operation as “C” corporations.
There are no disadvantages to LLC’s, if set up correctly. You should set it up in the state where you are primarily investing. People rave about Nevada, where there is no income tax, but if you invest in Florida, it gives you no protection from taxes.
If you are sued, it will be in the state where you invest, not in Nevada.
My father used to say, what do tax deductions and sex have in common? “You think your neighbor is getting more than you are.”
LLC’s get flow-through tax status, you get asset protection, and the IRS has not gone after partnerships as much as individuals filing schedule E’s and C’s. If you use a partnership, you file partnership form 1065, and rental income is reported on form 8825, not a schedule E, or schedule C, as business expenses.
Single-member LLC’s are more likely to be audited or lose in court because it’s hard to separate people from the business.
If you are a single person and are married, you have an easy partnership. Or you can create your own partnership by creating another LLC and treating it as a “C” corp. You personally own 90% and the “C” corp owns 10%.
Veil piercing is when the courts ignore the entity and reach the personal assets of the owner. If you intermingle your personal and business affairs so much that no one could tell the difference, they ignore the entity and treat it as all personal.
Segregate your LLC with properly-worded legal documentation for your LLC. Start with a separate bank account, put in money, and then pay your business expenses from that checking account. Sign everything as the agent of the LLC, not as a personal interest. The fewer the assets, the more the veil is tried to be pierced.
Articles of Incorporation are not the most important documentation. They are in the public domain.
The Operating Agreement, minutes of meetings, LLC certificates of ownership, and resolutions are the important issues. The operating agreement is the heart of the LLC. In our course, we have 240 agreements that cover all legal issues.
If you don’t maintain minutes, the veil can be easily pierced.
Resolutions are where everybody signs off that we are buying a property.
When you use company funds to pay for things that are personal in nature, your veil can be pierced. You should have a check issued from the company to you personally, and then pay those bills.
If you transfer a property from the LLC to a partner, it is not a taxable event. If it’s in a “C” corp, it will have to be stepped up to current value and taxes paid at a higher amount.
Our course LLC has 121 pages, including legal shield, tax protections, etc.
Bill listed the various categories of the operating agreement, explaining how the different categories protect you during a court event or IRS audit. “We explain to the IRS how the agreement gives you a roadmap to audit defense by giving the tax laws for each issue regarding real estate,” explained Bill.
All our documents are private, not on Sunbiz.org. The only time they are needed is in court. You would produce them during a legal action, so you are protected.
Bill stayed around to answer questions and explain what would be covered in the Saturday class.