Is the Sky Falling?

I could tell you from what we are seeing in mortgage modifications and short sales that things look a little bleak. Every week i meet with would-be investors who are now clinging on for dear life because they bought too much investment property without real income to support them. When I see people they are ready to walk-away, let it foreclose and tragically trash their credit for a decade.

There are choices and sometimes we have to face the music. The way your character is tested is by how well you deal with adversity, I’m finding many people are ready to abandon their leadership capability and run and hide under a rock. Sure there is a little embarrassment that goes with being a failed real estate investor but ultimately you have to face it and do what is right to keep your credit in tact.

First, a little history on credit scores. A company called the Fair Isaac Corporation created the first credit score. It was made available to lenders in the very late 80s and soon thereafter began to pick up momentum and popularity in the lending world. They called it the FICO score  and it became the gold standard in the mortgage and other consumer lending.

For years the FICO score was a mystery to consumers and was only known by the lending industry. Credit scores have only recently been made available to the public in the last few years. In 2001, California passed a law that required credit scores to be made available to California residents.

It also turned into a cash cow for the bureaus. However, for two of the three, instead of selling the actual FICO score, where they had to pay royalties to the Fair Isaac Corporation – they created their own scores to sell to consumers, that’s where the confusion started. Now all the bureaus  sell scores targeted at the consumer market, and unwitting consumers assume that these scores are the same scores a lender would see. Unfortunately, this is just not the case as Edward Jamision, Esq. would point out. His office has one of the best credit repair services that we look forward to bringing on.

Sometimes if you qualify for the loan modification which means you have a current loan that is 7.5% or more or is going to adjust or recast, and you want to stay in the home. Another thing you need to consider is getting your property tax bill reduced which we love to assist people with and you can examine the numbers for your self by going to this link. For a minimum fee you can get your annual tax bill reduced and save some money there.

If you’re looking to consider loan modification or if you owe more than the property is worth and are having financial difficulties you’ll want to download our questionnaire from here and you’ll also find our e-book “How to Avoid Foreclosure- 3 things you can do right now” which gives you great information on your options. Stop the worry and find solutions to your housing problem.

Untaxingly,

James Burns, Esq.

TAX REDUCTION AND ASSET PROTECTION FOR REAL PROPERTY

The most intimidating concern of real estate investors is how do I protect my property, reduce taxes and what entity if any should I use? First, you must have a very good tax and legal team who understands real estate and investors.

If you are an investor who does rehabs, fixer uppers, option contracts, developments, consulting and services or you are a real estate agent or broker you are facing self-employment tax which is upsetting. The rate is 15.3% which is the difference of the 7.65% that an employer withholds for social security and Medicare and then matches. As a self-employed individual, you receive no match and pay the entire 15.3%.

If you’re paying elevated self-employment tax, you are a sole proprietor. Often a client can optimize their situation by using an entity but which one will do the trick? By now you’ve probably been racking your brains on this very question and heard of the C-corp., S-corp., Limited Liability Company (LLC), and Family Limited Partnership (FLP). The C-corporation is sometimes effective by typically not a good fit for most because it creates a double taxation. The S-corp is generally best for a company raising capital or going public. However, sometimes a C Corporation may be appropriate for other operations because its initial tax brackets of 15% and 25%.  For example, if you’re in an individual tax bracket of 25% or higher, then there could be an opportunity to eliminate taxes by shifting some of your income to a C Corporation. This has a nice application because of the shifting of income to a taxpayer (your C Corporation for instance) in a lower tax bracket than you personally.

The S-corporation makes great sense for those who are doing consulting, rehabbing, fix & flips, developments and services because it is a flow through entity. Because of this flow-through capability there is no capital gains tax and no dividend tax but you have to take a “reasonable salary” and create a payroll which is probably the biggest intricacy. There are no hard and fast rules on the salary and is a subjective analysis. My team and I have devised a spit that is prudent, yet reduces tax. This salary/dividend split is the number one strategy for ordinary income. Remember when dealing with real estate investing we may have passive or ordinary income and for each type of income there will be a different strategy that in combination, slays some of the tax and provides protection.

Some of the difficulties with the S-corp. if you want to really nitpick are, it is inflexible in moving long-term real estate in and out and you have to do a quarterly payroll. The payroll is simple to deploy but you need to find a cost-effective tax preparer who will do it or use a payroll company and it should not cost an arm and a leg to get done but the savings will substantially offset this expense. A good rule of thumb on when it makes sense to have an S-corp is around $50,000 or more of ordinary income.

If you’re not doing anything but buying and holding then you’ll want to consider a limited liability company (LLC). You will not get the abatement in self-employment tax but you have liability protection and an opportunity to do some creative estate planning to avoid future estate taxes. Owning a small business for rental real estate is an excellent strategy since it may convert personal expenses to business expenses that will offset income even if you are currently an employee receiving a W-2 from an employer. The LLC also limits a creditor to a charging order which is an assignment of income and many LLCs do not distribute or can elect to not distribute thereby making this a hopeless remedy for the creditor. Contrariwise, a limited partnership can be foreclosed upon by statute in California.

Sometimes clients are told to use an LLC and have their S-corporation be the general partner of their family limited partnership (FLP) and this can create vulnerabilities to the stock of that S-corporation by a lawsuit that occurs outside of the LLC activities. The strongest portfolios seem to be those that have a combination of active real estate investing e.g., fix & flips, rehab, and passive in the form of rental real estate which can then be used to offset income of the active investing, however, this requires use of two entities.

In closing, clients are often confused where the best place is to set up there entity because they hear all the radio ads about Nevada. If you are a resident of California, you will not save any taxes by forming your entity out of the state. There other states that have stronger protection (e.g. Delaware) and under the Supreme Court Doctrine of the Internal Affairs, a corporation will be governed by the state of incorporation but any disputes arising will have the law of the jurisdiction where the dispute occurs applied. For example, if you are incorporated in Delaware and hold Texas property and encounter a challenge in Texas, Texas law will be applied but how the corporation is run and its structure should be preserved under the state of incorporation which would be Delaware.

If you have any questions about setting up your real estate investing business you need to find a great team for the tax and legal strategies. The best is usually an attorney and CPA who are also investors and understand the merits of owning real estate. This is only a broad brush stoke on the possibilities and each persons circumstances are different so you would need to be evaluated, as one size does not fit all.

Happy investing,

James Burns, Esq.

“How Much is Retirement Costing You?”

No matter who becomes our new President it is almost assured that the entire marginal tax rate will have to shift and that means a deferred retirement plan will get hammered when you retire. Typically you put away money without tax for a number of years and then when you retire your taxed at ordinary income rates which if the tax rate shifts, means whether your successful or not successful you’re going to pay more tax on those saved dollars. The key is to reduce fees and taxes so that what you put away gets further.

When you invest in the typical mutual fund (assuming outside of a qualified retirement plan), you face costs that erode your benefit. Chances are you’re not aware of them, they’re not in your prospectus and your broker isn’t going to sit down and tell you about them. The five costs of mutual fund investing are:

1. Tax costs – excessive capital gains from active trading.

2. Transaction costs – the cost of the trades themselves.

3. Opportunity costs – dollars taken out of portfolios for a fund’s safekeeping.

4. Sales charges – both seen and hidden.

5. Expense ratio, or “management fees” – no end to increases in site. This is a calculation based on the operating costs of the fund divided by the average amount of assets under management.

How radically do fund expenses affect you? Well, with the expense ratio, which averages 1.6% per year, sales charges of 0.5%, turnover generated portfolio transactions costs of 0.7% and opportunity costs of 0.3%—when funds hold cash rather than remain fully invested in stocks— the average mutual fund investor loses 3.1% of their investment returns every year just on fees. While this might not seem like much on the surface, costs and fees alone could consume 31% of a 10% market return. Think about that. You could be losing almost a third of your return before it’s even taxed. You’re losing a third of your return just for the cost of maintaining your investment. Add in the 1.5% capital gains tax bill that the average fund investor pays each year and that figure shoots up to 46% of your return being lost to fees and expenses, nearly half of a potential 10% return.

In my new book “The 3 Secret Pillars of Wealth” we discuss tax-free strategies that reduce fees and allow you to save more that will go much further. We’ve identified two vehicles that allow for tax-free build-up and one of those is the proper use of savings grade life insurance that is described in the book. Also, I have an e-book on tax-free income for life that lays out the strategy to help you be successful.

Untaxingly,

James Burns, Esq.

The Sky may be Falling for the Next Decade

As a result of our efforts to save homes and in essence, save America, we are finding out that this popped bubble may last a decade.

Recent reports show that Wachovia and Washington Mutual may have concealed the actual numbers of defaults on their books so that executives could get their bonuses. This means other banks could fall by way of Indymac and have difficulties going forward.

The good news is if you have a loan on your home or an investment property that is costing you more than it’s worth or you put the wrong loan on it, we can help with a loan modification or short sale.

Here is a recent modification case.

Woman was at 10.95% before modification.

New modification:

2.25% for next 3 years adjusting to 6.25% cap in 2014. She makes no payments until October 2008 and was settled this month.

If you need help go to this page and download the modification questionnaire. Fax it in to us when it is completed.

Stay safe,

James Burns, Esq.