Real Estate Holding Companies Overview

What's going on guys, it's Carlton Dennis, licensed enrolled agent, and I am back with another video. And today we are going to be talking about real estate holding companies. Now I'm not going to be doing any scripts or talking in any fancy format today. I've actually just written down some questions that I've got that came through on my YouTube channel that I wanted to read off to you guys and answer them in a way that you guys can be able to relate. I have a lot of people that are asking about holding companies and what are holding companies and we're going to start off with why you would even need a holding company. Many people that I work with care a lot about liability protection. They don't want to be caught up in a lawsuit. They don't want to have their personal assets exposed in the event that something could happen at their rental. properties. When you think about a rental property, what holds people back from actually going into real estate is not having to spend the money. You can eventually get over the fact that you have to spend the money. What really holds people back from going into real estate is somebody being upset with the property because something went wrong and then them calling you in the middle of the night. That's the worst thing that could ever happen. And at least that's what holds people back from buying real estate. But if you even think deeper, what if somebody were to get hurt at your property? What if somebody were to get sick and got asbestos in your roof and it got into their throat? God forbid. Who knows, right? This is a real estate investor's worst nightmare. So setting up an LLC is a must for real estate investors who care about protecting their personal wealth. Now, when you embark on the LLC journey, you'll learn about holding companies, management companies, parent companies, and all of this will become confusing. The first thing that you need to know about a holding company. is its own job. The job of a holding company is to hold things. It's not meant to do a whole lot of other things other than just hold your investment property. So rudimentary facts about your holding company. If you transfer your title of your property out of your individual name into the name of the LLC, your LLC is now holding the property, hence the word holding company. The reason why we want to transfer title out of your name into the name of the LLC is because the LLC has its own EIN number and it's the vehicle that will provide you, the member who owns the LLC, with liability protection. This is always rule number one of why we would even think about establishing a holding company. Now that we understand why establishing a holding company is so important, how do you actually use a holding company? When I first bought my investment property in Deerfield Beach, Florida, it was a short-term rental that I set up an LLC for. I transferred money from my own individual bank account into that LLC. I did an owner's contribution into that LLC. But the reason I did that is because I didn't have enough cash flow coming in from the tenants from day one to cover the mortgage because I had just gotten the property and I was listing it as a short-term rental. So I needed to transfer money from my personal bank accounts into that LLC to then pay the mortgage. And the reason why I chose to do that is because I wanted my holding company that was holding the LLC to pay for all of the expenses related to the property that it was holding. This is how you use your holding company. You're going to use it to pay for the expenses associated with the asset that it's holding. But anytime I receive income from my tenants from Airbnb.com or VRBO.com, the same holding account bank account I registered with Airbnb and I registered with VRBO. So my holding account is receiving income from the rents of my tenants staying on a transient basis, but I'm also simultaneously paying the mortgage and any related expenses directly out of that holding company. This is how you can use your holding company effectively. One question that will come up as you study and research on my channel is when does it make sense to transition a holding company to an S-Corp? I caution you right there. Normally, we do not transition holding companies that are holding rental real estate into S-Corporations. The reason why we do not transfer. Holding companies that have rental real estate into S-corporations is because the LLC already provides sufficient liability protection and with an LLC, you're not subject to self-employment taxes with your rental income. Self-employment taxes are Social Security and Medicare taxes. It's another word for FICA taxes. When you own rental real estate, the advantage of making passive income is passive income is not subject to self-employment. employment taxes or FICA taxes, which is 15.3%. Now, if you're a self-employed business owner and you're making a lot of money, it might make sense for you to be an S corporation. But when your rental properties are making a lot of money, we keep your rental properties in holding companies and we do not transition them to S corporations. That being. Said one of the downsides to transitioning your holding company LLC into an S corp is you make the transfer of the property coming in and out of the S corp a taxable event. When you transfer assets in and out of an LLC, it's not a taxable event as it pertains to real estate. However, with an S corporation or a C corporation, it is considered a taxable event. Not to mention, when you transition that asset to your heirs in the future via a revocable living trust, you will run into complications with receiving step-up in basis because normally assets that are held in LLCs such as real estate receive that step-up in basis that we desire for our heirs. Now, when it pertains to your LLCs and rolling them into a trust, this is when I would resort to your attorney to properly advise you on your estate planning based off of your goals. Now, the next question that I get is how many holding companies, Carlton, should I be setting up for the real estate investing that I'm going to be doing? And to be honest with you, that answer is different for everybody. And it's also based off of your comfortability. Now, for me, when I'm setting up rental properties, typically I'm putting each rental property into separate holding companies. But there are times when I'm buying assets that are a little bit on the cheaper end. When I say on the cheaper end, I'm talking about properties that are 400K and less. And sometimes when I'm buying some of these duplexes or triplexes in the midwest i know that these properties are very inexpensive and so i don't mind grouping some of these properties into one holding company now i have some pretty expensive properties too a couple of properties that are in the seven figures god forbid would i want to group some of those bigger assets into my properties that are cheaper where i could be exposing my property in the event of a lawsuit dealing with some of my smaller tenants that could come after my bigger 10 or 15 unit properties that we own This is why looking at the holding company is super important before you go into rental investing and determining what you feel comfortable with based off of the amount of equity you have in the property and how much value you're willing to put based off of the property into one LLC. In my office and what we advise our clients on is typically we don't like to have more than 2 million worth of equity or total value of property in one LLC at any given time. which means that if you have a bunch of duplexes and each duplex is 200K, maybe you have four duplexes that in combination would be 800K worth of real estate. We probably would be okay with you putting those properties into one LLC to mitigate some of your accounting requirements, to mitigate some of those additional tax returns that you would have to file and those additional state filing fees for every single LLC. But you would also have to be aware that if the event that something happened to one of your duplexes and they decided to sue you, they could sue the entire LLC, which means that they could come after the equity that you have in the three other duplexes that are underneath that LLC. This is why establishing multiple holding companies can be beneficial, but we also need to weigh the pros and cons. One of the reasons why we do this is because you may be cash flowing from your investment properties, but as soon as we set up multiple LLCs. for those three or four duplexes, now you have to file the tax returns for four separate LLCs and you have to do the bookkeeping and accounting for four separate LLCs. And now you could be in a position where you're no longer cashflow positive just to pay for the accounting fees for having separate LLCs. That kind of is counterintuitive to going into real estate. Most of us are going into real estate because it's a safe place to park our money, where we can appreciate our money over time, get mortgage pay down while simultaneously getting cashflow and tax benefits. But if the cash flow is not there, it makes real estate a less sexy investment opportunity. So we as tax professionals have to do the math for you. We have to determine how much your property is going to cash flow, then determine how much equity is inside of your property, then determine the value of the properties that you're purchasing to determine how many LLCs we need to set up for you that are going to be your holding companies to hold your properties. Now, the last question I want to tackle today is can another holding company own my existing holding company? This answer is absolutely. If you have a single member LLC, you can definitely have a multi-member LLC own that single member LLC. If you have a single member LLC, you can have another single member own that LLC that's a single member. Layering LLCs has become more popular today than ever before because of the access to information around entity structuring. That being said, you as a taxpayer could have a single member LLC that owns your property in Texas. But then maybe you have another LLC that's in a state such as Wyoming or Nevada that is the parent company over your holding company. Part of the reason why we establish parent companies is because some of the laws and jurisdictions in the parent company's state prevents the manager's names and information from being public record. I have a parent company in the state of Wyoming that owns my individual LLC holding companies. The reason why is because the state of Wyoming has a court of chancery that can deal with any type of landlord issue. that I might get into if I were ever sued. But more importantly, it keeps my name anonymous. When people go to look up my properties in Florida or Texas, they will see that those properties are owned by this Wyoming business. And then if they were to research that Wyoming business, they can't find out who owns that Wyoming LLC. They will only see my registered agent's address. This provides a great layer of protection because it prevents a creditor from trying to determine how they're going to sue me. When you don't know who you're suing, sometimes it prevents you from being able to sue or you may choose not to sue. This right here gives me control as a landlord and also protects me and my family. Many people, when they get upset about various different reasons, they can choose to go online, research your information. They can get on LinkedIn and Facebook and find out you have a family, find out where you live, where you like to hang out, where you work out. and it can be very scary if you're somebody that's trying to build your wealth and protect your family and you have kids it is very important that you take your liability protection seriously and it's also very important that you use your holding companies the right way i hope this video gave you more information around holding companies as a whole i hope you're going to be setting up holding companies for your rental properties as well if you have any questions or would like to get help with my team go ahead and click on the link below you can schedule a complimentary tax strategy consultation We'll discuss with you how you can use real estate to offset your tax bill, establish your holding companies for you, and make sure that you are working to get into compliance with the IRS by leveraging the tax code. My name is Carlton Dennis. Thank you so much for watching this video. You know what to do. Like, comment, subscribe. I'll see you on the next one. Cheers.

I've actually just written down some questions that I've got that came through on my YouTube channel that I wanted to read off to you guys and answer them in a way that you guys can be able to relate. I have a lot of people that are asking about holding companies and what are holding companies and we're going to start off with why you would even need a holding company. Many people that I work with care a lot about liability protection.

They don't want to be caught up in a lawsuit. They don't want to have their personal assets exposed in the event that something could happen at their rental. properties.

When you think about a rental property, what holds people back from actually going into real estate is not having to spend the money. You can eventually get over the fact that you have to spend the money. What really holds people back from going into real estate is somebody being upset with the property because something went wrong and then them calling you in the middle of the night.

That's the worst thing that could ever happen. And at least that's what holds people back from buying real estate. But if you even think deeper, what if somebody were to get hurt at your property?

What if somebody were to get sick and got asbestos in your roof and it got into their throat? God forbid. Who knows, right? This is a real estate investor's worst nightmare.

So setting up an LLC is a must for real estate investors who care about protecting their personal wealth. Now, when you embark on the LLC journey, you'll learn about holding companies, management companies, parent companies, and all of this will become confusing. The first thing that you need to know about a holding company.

is its own job. The job of a holding company is to hold things. It's not meant to do a whole lot of other things other than just hold your investment property.

So rudimentary facts about your holding company. If you transfer your title of your property out of your individual name into the name of the LLC, your LLC is now holding the property, hence the word holding company. The reason why we want to transfer title out of your name into the name of the LLC is because the LLC has its own EIN number and it's the vehicle that will provide you, the member who owns the LLC, with liability protection.

This is always rule number one of why we would even think about establishing a holding company. Now that we understand why establishing a holding company is so important, how do you actually use a holding company? When I first bought my investment property in Deerfield Beach, Florida, it was a short-term rental that I set up an LLC for.

I transferred money from my own individual bank account into that LLC. I did an owner's contribution into that LLC. But the reason I did that is because I didn't have enough cash flow coming in from the tenants from day one to cover the mortgage because I had just gotten the property and I was listing it as a short-term rental.

So I needed to transfer money from my personal bank accounts into that LLC to then pay the mortgage. And the reason why I chose to do that is because I wanted my holding company that was holding the LLC to pay for all of the expenses related to the property that it was holding. This is how you use your holding company. You're going to use it to pay for the expenses associated with the asset that it's holding. But anytime I receive income from my tenants from Airbnb.com or VRBO.com, the same holding account bank account I registered with Airbnb and I registered with VRBO.

So my holding account is receiving income from the rents of my tenants staying on a transient basis, but I'm also simultaneously paying the mortgage and any related expenses directly out of that holding company. This is how you can use your holding company effectively. One question that will come up as you study and research on my channel is when does it make sense to transition a holding company to an S-Corp?

I caution you right there. Normally, we do not transition holding companies that are holding rental real estate into S-Corporations. The reason why we do not transfer.

Holding companies that have rental real estate into S-corporations is because the LLC already provides sufficient liability protection and with an LLC, you're not subject to self-employment taxes with your rental income. Self-employment taxes are Social Security and Medicare taxes. It's another word for FICA taxes. When you own rental real estate, the advantage of making passive income is passive income is not subject to self-employment. employment taxes or FICA taxes, which is 15.3%.

Now, if you're a self-employed business owner and you're making a lot of money, it might make sense for you to be an S corporation. But when your rental properties are making a lot of money, we keep your rental properties in holding companies and we do not transition them to S corporations. That being. Said one of the downsides to transitioning your holding company LLC into an S corp is you make the transfer of the property coming in and out of the S corp a taxable event.

When you transfer assets in and out of an LLC, it's not a taxable event as it pertains to real estate. However, with an S corporation or a C corporation, it is considered a taxable event. Not to mention, when you transition that asset to your heirs in the future via a revocable living trust, you will run into complications with receiving step-up in basis because normally assets that are held in LLCs such as real estate receive that step-up in basis that we desire for our heirs. Now, when it pertains to your LLCs and rolling them into a trust, this is when I would resort to your attorney to properly advise you on your estate planning based off of your goals.

Now, the next question that I get is how many holding companies, Carlton, should I be setting up for the real estate investing that I'm going to be doing? And to be honest with you, that answer is different for everybody. And it's also based off of your comfortability. Now, for me, when I'm setting up rental properties, typically I'm putting each rental property into separate holding companies. But there are times when I'm buying assets that are a little bit on the cheaper end.

When I say on the cheaper end, I'm talking about properties that are 400K and less. And sometimes when I'm buying some of these duplexes or triplexes in the midwest i know that these properties are very inexpensive and so i don't mind grouping some of these properties into one holding company now i have some pretty expensive properties too a couple of properties that are in the seven figures god forbid would i want to group some of those bigger assets into my properties that are cheaper where i could be exposing my property in the event of a lawsuit dealing with some of my smaller tenants that could come after my bigger 10 or 15 unit properties that we own This is why looking at the holding company is super important before you go into rental investing and determining what you feel comfortable with based off of the amount of equity you have in the property and how much value you're willing to put based off of the property into one LLC. In my office and what we advise our clients on is typically we don't like to have more than 2 million worth of equity or total value of property in one LLC at any given time.

which means that if you have a bunch of duplexes and each duplex is 200K, maybe you have four duplexes that in combination would be 800K worth of real estate. We probably would be okay with you putting those properties into one LLC to mitigate some of your accounting requirements, to mitigate some of those additional tax returns that you would have to file and those additional state filing fees for every single LLC. But you would also have to be aware that if the event that something happened to one of your duplexes and they decided to sue you, they could sue the entire LLC, which means that they could come after the equity that you have in the three other duplexes that are underneath that LLC. This is why establishing multiple holding companies can be beneficial, but we also need to weigh the pros and cons. One of the reasons why we do this is because you may be cash flowing from your investment properties, but as soon as we set up multiple LLCs.

for those three or four duplexes, now you have to file the tax returns for four separate LLCs and you have to do the bookkeeping and accounting for four separate LLCs. And now you could be in a position where you're no longer cashflow positive just to pay for the accounting fees for having separate LLCs. That kind of is counterintuitive to going into real estate.

Most of us are going into real estate because it's a safe place to park our money, where we can appreciate our money over time, get mortgage pay down while simultaneously getting cashflow and tax benefits. But if the cash flow is not there, it makes real estate a less sexy investment opportunity. So we as tax professionals have to do the math for you. We have to determine how much your property is going to cash flow, then determine how much equity is inside of your property, then determine the value of the properties that you're purchasing to determine how many LLCs we need to set up for you that are going to be your holding companies to hold your properties. Now, the last question I want to tackle today is can another holding company own my existing holding company?

This answer is absolutely. If you have a single member LLC, you can definitely have a multi-member LLC own that single member LLC. If you have a single member LLC, you can have another single member own that LLC that's a single member. Layering LLCs has become more popular today than ever before because of the access to information around entity structuring.

That being said, you as a taxpayer could have a single member LLC that owns your property in Texas. But then maybe you have another LLC that's in a state such as Wyoming or Nevada that is the parent company over your holding company. Part of the reason why we establish parent companies is because some of the laws and jurisdictions in the parent company's state prevents the manager's names and information from being public record.

I have a parent company in the state of Wyoming that owns my individual LLC holding companies. The reason why is because the state of Wyoming has a court of chancery that can deal with any type of landlord issue. that I might get into if I were ever sued. But more importantly, it keeps my name anonymous.

When people go to look up my properties in Florida or Texas, they will see that those properties are owned by this Wyoming business. And then if they were to research that Wyoming business, they can't find out who owns that Wyoming LLC. They will only see my registered agent's address. This provides a great layer of protection because it prevents a creditor from trying to determine how they're going to sue me.

When you don't know who you're suing, sometimes it prevents you from being able to sue or you may choose not to sue. This right here gives me control as a landlord and also protects me and my family. Many people, when they get upset about various different reasons, they can choose to go online, research your information. They can get on LinkedIn and Facebook and find out you have a family, find out where you live, where you like to hang out, where you work out.

and it can be very scary if you're somebody that's trying to build your wealth and protect your family and you have kids it is very important that you take your liability protection seriously and it's also very important that you use your holding companies the right way i hope this video gave you more information around holding companies as a whole i hope you're going to be setting up holding companies for your rental properties as well if you have any questions or would like to get help with my team go ahead and click on the link below you can schedule a complimentary tax strategy consultation We'll discuss with you how you can use real estate to offset your tax bill, establish your holding companies for you, and make sure that you are working to get into compliance with the IRS by leveraging the tax code. My name is Carlton Dennis. Thank you so much for watching this video. You know what to do. Like, comment, subscribe.

I'll see you on the next one. Cheers.

Transcript for:Real Estate Holding Companies Overview

Transcript for:
Real Estate Holding Companies Overview