“Not-for-Profit” Rentals result in Bad Tax Consequences

Many real estate investors aren’t aware of WHAT allows expenses to be tax deductible. The answer is: a business purpose and profit motive. If you lack one or both, an IRS audit on your rentals will not turn out well, because expenses you thought were deductible are disallowed. The IRS calls these “not-for-profit” activities. Your “rentals” may appear to be “not-for-profit” rentals when you: Charge
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Categories: ASSET PROTECTION and TRUSTS, ESTATES & FIDUCIARIES.

Collecting Fair Market Rent is Vital to Tax Deductions

Beware: If you don’t collect fair market rents (FMR) on your rental properties, your tax deductions may be disallowed by the IRS. The reason is that the Tax Code requires that deductible expenses have a business purpose AND that you have a profit motive in order to take tax deductions. If audited by the IRS, you may have to prove that you’re collecting FMR, which
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Categories: ASSET PROTECTION and TRUSTS, ESTATES & FIDUCIARIES.

Real Estate Sales can be Audited Back Six Years

Ordinarily, the IRS has three years to audit you after you file your tax returns, but some returns can be audited back six years. These audits often involve real estate sales when IRS believes you omitted 25% or more of your gross income. When it comes to real estate sales, IRS argues that taxpayers claimed excess basis for a property when it was sold, resulting
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Categories: ASSET PROTECTION and TRUSTS, ESTATES & FIDUCIARIES.

IRS is Auditing My Rental Losses

Many real estate investors assume that if audited their records and receipts are all they need to win the audit. However, it’s not always having the receipts that allows for the deductions, but what motivates you and your intentions at the time. Real estate investors need to understand exactly WHAT allows for a tax deduction? (It’s more than receipts). The Tax Code requires that you
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Categories: ASSET PROTECTION and TRUSTS, ESTATES & FIDUCIARIES.

IRS Wins by Reclassifying Rental to “Investment Property”

It’s not just the lack of receipts and records that cause most real estate investors to lose when audited by the IRS. Often, it’s their own testimony used against them that allows the IRS to reclassify their activity into something passive for a less favorable outcome. To illustrate a difference in the Tax Code over active v. passive participation, let’s discuss two hypothetical neighbors living
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Categories: ASSET PROTECTION and TRUSTS, ESTATES & FIDUCIARIES.

IRS Audits of Cabin Vacation Rentals

Having receipts and great records doesn’t mean that an IRS audit will go well. IRS auditors are masters of invoking provisions in the Tax Code that often make receipts and records useless. The tax rules are especially complex when renting a property for a few days at a time, such as renting-out a family cabin when you’re not using it. The following is an example
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Categories: ASSET PROTECTION and TRUSTS, ESTATES & FIDUCIARIES.

Reducing Liability by Segregating Assets

To help hold onto what you’ve worked hard to accumulate and to manage risk (especially for business owners) it’s important to segregate assets and activities into separate legal buckets. The separate buckets should be put into place BEFORE the threat of legal action or the court may rule that a fraudulent conveyance occurred. The number of buckets needed will depend on the type of activities
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Categories: ASSET PROTECTION and SMALL BUSINESS ADVISORY.

Reducing Liability with Good Business Practices

Business owners need to demonstrate good business practices in order to reduce their company’s liability and to prevent personal liability themselves. Operating a business through an LLC or corporation won’t protect your home and personal property from business lawsuits and creditors if you don’t also demonstrate good business practices. The following are some of our recommendations: Maintain the corporate or LLC veil of protection.  Even
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Categories: ASSET PROTECTION, CORPORATIONS & LLCs, and SMALL BUSINESS ADVISORY.

Does your LLC or Corporation have Legal Standing?

The vast majority of small business LLCs and corporations in California may lack legal standing due to being improperly formed. To be properly formed under California law: LLCs must file articles of organization with the Secretary of State. These articles must be formally adopted by its members along with a signed operating agreement during its initial organizational meeting and recorded in the first minutes and
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Categories: ASSET PROTECTION, CORPORATIONS & LLCs, and SMALL BUSINESS ADVISORY.

Proper Formation and Maintenance of LLCs and Corporations is Mandatory

Proper formation of your LLC or corporation is mandatory to have legal standing in California. LLCs that lack operating agreements and corporations without approved bylaws may not be protected in California. Without legal standing your home and personal assets could be exposed to business lawsuits, liens and creditors. (See our article: “Does your LLC or Corporation have Legal Standing?” for details). Not only are operating
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Categories: ASSET PROTECTION, CORPORATIONS & LLCs, and SMALL BUSINESS ADVISORY.