$40,000 real estate class

Technical topics regarding tax preparation.
#1
EADave  
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I swear, if another client comes to me and tells me they took a real estate class and spent $40,000, I will drive to the nearest hardware store, buy the client a tack hammer and tell them to bludgeon themselves (not to kill them, but to inflict proper brain damage to prevent future blunders).

Client comes to me after paying $40,000 for a “Rich Dad” real estate seminar and the brilliant advice was to create a C Corp that will act as the parent company to his LLC (DRE) that owns a residential rental property. When I asked what was the strategy behind this, his attorney told him it would provide him with anonymity. Thankfully, the client has only created the C Corp and did nothing else.

I’ve had two clients in two weeks tell me this advice was given to them. Form an LLC to hold title to rental real estate, then form a C Corp to act as the parent company, then put all the LLCs under the C Corp. What is going on? I clearly am missing something here. Would that not trigger gain? Transferring an asset with a liability into a C Corp? And then, what if you wanted to transfer the asset out of the C Corp?

Then the client tells me the C Corp would act as the Management Company. Well, news flash, he already engages a third party management company to operate the rental. Tack hammer time.

Can someone help me out here? Am I behind the times? Did I miss something? I’ve never ever heard of a sound real estate purchasing/investing plan involving a C Corp. Hep me buddies!
 

#2
Frankly  
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EADave wrote: When I asked what was the strategy behind this, his attorney told him it would provide him with anonymity.
Answers like this just lead to the next question, like "why do I want anonymity?" What might happen if the tenant knows who owns the house? Lots of building owners actually talk to their tenants, even stop by and collect the rent every month and check on things. Why is that a bad thing?

Maybe the attorney helps one become a slumlord.
 

#3
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I assume that the same client who pays $40k for the real estate class would balk at paying $1k-$2k to have the corporate returns prepared, too?
 

#4
sjrcpa  
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Not that I think this is a good idea, but the C Corp would not own the real estate. Ownership of the real estate remains with the LLC(s).
 

#5
Nilodop  
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But the LLCs are disregarded.
 

#6
sjrcpa  
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The LLCs are disregarded for tax purposes, but not legally.
 

#7
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But if the LLC is disregarded for tax purposes, and the parent company of the LLC is a C corp, then the LLC is taxed as a C corp.

Many of us around here, JR1 primarily, have strong feelings about that.
 

#8
EZTAX  
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And the op has not even brought up the next question - can I deduct the 40k this year or next? :(
 

#9
EADave  
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Great question EZ Tax. This may be a bit aggressive, but since the client already owned real estate prior to taking the class, I am amortizing the $40,000 expense over 15 years. Don’t ask me for the reasoning; I know this may be considered education expenses to obtain a new career (not deductible), but I am leaning more towards research and development and/or startup costs, but I did not elect the first $5K off the top. Bring on the sledgehammers people, I know.

My line of thinking aligns with all your comments. Anonymity; who cares anymore? Google tracks your every move. You can escape....The Google....
 

#10
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Another thing of which to warn your client is that (I've heard) that many property loans become "callable" if ownership structure is changed.

So if rates go up and the lender wants an excuse, they can take the loan away.
 

#11
Chay  
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None of this explains why a C Corp is a better choice than an S Corp for this anonymous (slumlord?) rental activity.

Are we aiming to make this a zero-dividend corporation and gradually grow our rental business empire with the retained earnings, which we would first invest in a portfolio of dividend-paying stocks qualifying for the dividends received deduction?

If so, it's a bit of an eclectic strategy. What are the inheritance implications of bequeathing something like that?
 

#12
EADave  
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Great point Chay, I said the same thing about inheriting the property; he can kiss the step up in basis goodbye.

I have another client (I know, where do they come from?) that setup an Alaska C Corp, a Utah LLC, and a Nevada LLC to house rental properties in three completely different states. SMH. That’s Shaking My Head for those not familiar!
 

#13
Dennis2  
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What are the inheritance implications of bequeathing something like that?


Stock in C corp gets dod value
 

#14
Chay  
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Dennis2 wrote:
What are the inheritance implications of bequeathing something like that?


Stock in C corp gets dod value

And, if a proper "rich dad" strategy has been followed to that point, there will have been several 1031 exchanges and possibly no standard sales. So now the kids are sitting around holding shares to a family rental enterprise with heavily or fully depreciated real estate sitting around in it. What's the endgame here? Do they try and show a good cashflow and then sell shares in the company to others? Do they sell the real estate within the C Corp? Take property distributions?

Or maybe the corporation invests in hedge funds to generate passive activity income to write off the oodles of PAL carryforward against?
 

#15
EADave  
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All great questions Chay, to which the client has no answers. Poor folks get tricked into taking a seminar costing $40,000 providing them with information they could’ve gleaned from binge watching a reality show on the DIY channel! Reminds me of the bar scene in Good Will Hunting (you could’ve got the same education by paying $1.50 in library late fees; something like that).

I think I will put on a seminar that costs $99.95 per person and the premise will be “Don’t pay $40,000 on a real estate seminar; instead, use that money for a down payment on a rental property, make some mistakes and guess what??? LEARN FROM THEM.”

I might need help with the title, but if someone could Co-host this thing with me, I’ll split the profits!

I had a client purchase two properties in MO for less than $40,000; now they generate $800 a month in rent each! Shoot, pay me $40,000 and I’ll tell you how to make money in real estate.....buy some and try not to let the renters destroy them!!! Ok, back to my cave now....
 

#16
Frankly  
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Which make one more money - using the secret real estate formulas, or running seminars? This is reminiscent of the book entitled How to Become a Millionaire. The premise is to write a book entitled How to Become a Millionaire and sell a million copies.
 

#17
Wiles  
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I hope your client took an early distribution from their IRA to pay for this class :evil:
 

#18
EADave  
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Ouch!! I just Googled $40,000 real estate seminar and the one from Rich Dad came up; first result!! Hilarious. I know how to become a Rich Dad; sell a book and seminar giving people common sense advice and telling them, “You can do it!!”
 

#19
Wiles  
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LOL. You can play the clip of Rob Schneider from The Waterboy in the background.
 

#20
tshonk  
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I had two clients that were real estate developers and held large rental complexes. They each had a C corp that had an Oct year end. The C corps were partners in all the developments and complexes. They were able to defer income for 10 months since the Dec year end K-1's income was not reported until the C corp filed their Oct year end returns. They then did a bonus in Mid October to get the taxable income down to zero. Plus, they were entitled to all of the fringe benefits of a C corp.
 


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