Jane ~ Hi Everyone, thank you for joining the show. Today we are here to discuss buying and selling investment properties with Jo Ann Koontz of Koontz & Associates is kind enough to come along and help us. Jo Ann, welcome to the show. We are looking forward to hearing what you are going to bring to the table today, with regard to advice on Do's and Don'ts.
So before we get going, do you want to tell us a little bit about what you have to offer and what Koontz & Asscotates has to offer to the client out there looking to invest?
Jo Ann ~ Sure, what we offer essentially a one firm kinda mentality. We have a law firm and a CPA under one roof, operating together to offer holistic advice from legal to tax, real estate to business, the whole lot. For anybody that is in any kind of business in particularly in the real estate business. I am dual certified as an attorney and as a CPA. There are two other lawyers in my firm, there are 3 other CPA's in the CPA side of the firm. I'm the only one thats dual certified but certainly all the work funnels through me and through the firm, in a way that every single transaction whether anybody asked for tax advice or not we have reviewed it to make suggestions if there is a tax consequence that needs to be address.
Jane ~ Ok so anyone looking to start a business whether its to invest in real estate or a business in general, you can look at their financial position, evaluate particularly the subject we are talking about today, investment properties and see how that tax implication, how thats going to effect their bottom line.
Jo Ann ~ We are going to look at their personal tax plus the entity structure to make sure their are protected from liability. Do they have partners? Are they going into this with somebody and to make sure that all of that is sorted before they get involved.
Jane ~ As you can imagine the real estate market at the moment is very strong, its very balanced. You have a lot of people now more confident to put their money back into real estate, so that they can have a nest egg whether its to increase their portfolio long term or whether its to buy that property that needs to rehab and to resale. From that point of view, when would it be appropriate for someone to set up a company vs doing it as an individual, when they are looking from an investment point of view?
Jo Ann ~ So couple of things to consider; one for investment, if you are going to hold say vacant land and you are going to wait for it to appreciate, that is probably a situation that we can probably use an individual name, its probably going to be just fine. If we have rental property, that you are going to hold in the hope it appreciates but in the meantime put tenants in, ie annual tenants, short term beach rentals something like that. If you got other people outside, not your family, renting the property, you are definitely going to want to have an LLC from a liability protection. Honestly from personal to corporate on a rental property the tax treatment is almost identical. You are not really picking up a tax benefit so if you talk just to a CPA, they are probably going to tell you, don't worry about putting it in a LLC, which is great tax advice but terrible legal advice. So if we are trying to build this portfolio and trying to increase your wealth you dont want to leave your wealth exposed. In the event that something happens where you have liability God forbid a car accident or something like that or something happens to the tenant for example, someone was injured in the property, you want to separate that legal liability from the owner or the property from your other assets.
Jane ~ Right, and that can be established here and as far as if there's more than one person buying the property...
Jo Ann ~ Thats another reason you would want to consider an LLC. But if you have say vacant land that you are waiting on appreciation, its much easier to sort the financial commitment and the obligations and responsibility of each of the partners in the business through an LLC or similar vehicle than it is trying to do a property maintenance agreement where you and I are the individual owners of the property and we sort who is paying taxes, who's paying utilities etc. Thats not the best way to handle that.
Jane ~ And it takes out any of that grey area should something happen to you, there's very clear lines and there's no misunderstanding and everyones on the same page. So the big question is - What kind of mistakes do people make? What's the big "Please do not, for the sake of my sanity, do this?"
Jo Ann ~ Please don't do it yourself! #1. I always tell people, there's DIY shows all the time. You can watch, paint your own living room or do your own bathroom. You don't see DIY legal work, because no one wants to watch that. It's not pretty to watch! So I suggest a couple of things, #1 be mindful that when you close on a property in Florida you are lightly obtaining a Title Insurance Policy at the time of closing. If you go and make changes to the Title ownership after closing you are going to disrupt the Title insurance coverage which you would otherwise have for the lifetime you own the property for one premium payment at closing. So, for example, lets say you buy the property because you are down here and I am off traveling in Italy. So I am not going to be available for the closing so you say, you know what, just put it in my name and close and then we'll fix it when you return. Thats going to trigger a need to repurchase the Title insurance, which is not inexpensive. It is also going to trigger Documentary Tax again which in Florida we don't have a State income tax so our state generates revenue on the transfer of property, so you are unnecessarily duplicate your title insurance cost and you are unnecessarily duplicating your Documentary stamp cost and if you are taking mortgage on that property rather than paying cash you also increase documentary stamps and tangible tax again for the mortgage, let alone violating the terms of the Due On Sale clause, where the mortgage documents say, if you are going to transfer title to the property you have to get permission from the lender to do so or pay the loan off in full.
Jane ~ So in otherwords it can be very very costly.
Jo Ann ~ It can be extremely costly. And leave you unprotected where you didn't expect it.
Jane ~ Thats definitely something to bear in mind. Buying and selling properties obviously discuss with your agent (me obviously) before you go ahead that can certainly give you some guidance as to that property value, the resale value, the rental income, all that good stuff and also guide you to the legal representative that you need to discuss these avenues with. Because, as you've heard, it can be very costly.