Archive for September 2019

$20 Million “Change the World” Giveaway

This blog post is part of the 4th Annual Suicide Prevention & Awareness Month blog tour*. If you are feeling suicidal, please call the National Suicide Prevention Lifeline at 1-800-273-8255 or text HOME to 741741.

 

Eliminate old debt problems with this $20 million giveaway. Stop debt collectors in their path. No more annoying calls and harassment. #debt #giveaway #debtreduction  #debtcollectors #reducedebt #debtproblems #suicide #helpSeptember is National Suicide Prevention Month. Each of the last three years I participated in a Suicide Prevention & Awareness blog tour. Last year I published on the tragic story of a young woman who changed her life forever in an attempted suicide gone wrong. I pointed out how this is important even for the FIRE community, a group of people that accumulates wealth and avoids debt.

In 2016 I shared my personal struggle with depression and seasonal affective disorder (SAD)

Two years ago, in 2017, I outlined how I got into the hedge fund industry buying charged-off receivables. And that is where our story begins today.

 

Trouble in Paradise

Money problems are a leading cause of suicide. Debt is usually the culprit, but medical bills also play a meaningful role.

You can read the 2017 article for more details, but the short story is I got into the debt buying business many years ago. When I bought a package of debt I ran a LexisNexis report to screen the accounts. 

Debt was parsed into categories and then sent to collection agencies and law firms. Most of these firms worked within the law, but some were fired when it was discovered they used inappropriate tactics to collect. 

Each file would have a LexisNexis report pulled once or twice per year in addition to what the collections firms did. And one of the disturbing trends was the high rate of divorce, job loss, medical issues and suicide. It was hard to work within an industry doing so much harm.

Monthly reports were filed by each collection agency and law firm with a remittance of what they collected the prior month, minus their fee. 

At this point it would be a good idea to review the John Oliver video on how the debt buyer industry works so understand how evil some of these people are.

 

 

I had to wash my hands. Unfortunately I had a fiduciary obligation to investors. 

To sooth my conscious I started sending copies of personal finance books to debtors who made any payment toward their delinquent debt. Dave Ramsey’s The Total Money Makeover was reasonably new so it was the go-to gift. 

The hedge fund’s attorneys soon caught wind of my behavior and warned me against sending the personal finance books. They felt it added litigation risk so I stopped as it put investors at risk.

Soon after I made my exit from the industry. Emotionally it was too much to handle. I could not push people over the edge to line my pocket.

 

Putting Experience to Work

Both debt buying hedge funds I managed did well; the first significantly better than the second. More important than the money was the experience I gained. I know the intimate details of buying, selling and collecting debt.

And I have contacts. 

When I ran across the John Oliver video I had to watch. Nothing much has changed since I ran those halls. 

As a debt buyer I could buy debt for pennies on the dollar. In many cases I could buy for less than a penny on the dollar! (You read that right. I could (and still can) buy massive packages of debt for a fraction of a cent on the dollar. One quick email or phone call and I can have a $20 million package of debt on my desk before the day is out for a mere $50,000.)

Debt kills. My actions within the debt buying industry, while always legal, was still part of the problem. Of course I was a small fish in the debt buying industry. However, the raindrop never blames itself for the flood, but they all play a role. 

It still bothers me all these years later. My legal team collected a lot of money from a lot of people. Most got into debt with their eyes open and really owed the money. Still, everyone does stupid stuff. There has to be a way to start over—an out, if you will. 

And more than I want to count, we forced too many people with medical debt to the edge. (Do you push a parent over the edge just to collect on a debt caused by their child’s medical bills?)

 

The Plan

John Oliver gave me an idea. What he did was buy a package of old medical debt and then wrote it off (didn’t collect on the debt) to the tune of $15 million. 

There are some tax issues with this, however. to solve the tax issue Oliver found an organization that handled the debt so the debtors didn’t get socked with taxes when the debt was forgiven.

However, I think Oliver got the tax issue slightly wrong. 

In the debt buying industry we don’t give anyone a 1099 for cancelled debt unless the debt is settled for less than full value. If the debt is never paid, no 1099 goes out! (The debt buying industry has good lobbyists.)

Also, a large percentage of these debtors have a negative net worth so even if they were to have cancelled debt it is not added to income to the extent the debtor is insolvent (Form 982).

This is where my plan comes in.

 

$20 Million Giveaway

End debt problems with this giveaway. It's raining money! Check if you qualify. No signing up. If you make the list your debt is automatically deleted. #debt #bills #collectors #billcollector  #deardebt #debtdrop #olddebtDelinquent debt keeps sloshing around, even when it is out of stat (statuette of limitations), getting sold again and again. When a new debt buyer takes over the collection actions ramp up again. The phone call are a serious distraction to the debtor.

The out of stat debt is really uncollectable. In some states—like Wisconsin—it is illegal to attempt to collect an out of stat debt. 

This is the dirty part. If a crooked debt collector can convince you to pay even a small amount the debt is then considered fresh and the clock starts all over again. In other words, you take a debt worth a half cent on the dollar and make it worth 10 cents on the dollar since it is now considered a debt with a recent payment. A simple $5 payment is all it takes to restart the clock and open the option the legal action.

The debt buyer can now go to court to collect the rest, plus interest! Or sell it for 10 times what he paid for it. The debtor can never get away from a financial bad spot, even debt older than a decade. The merry-go-round of debt selling never stops.

 

This blog has done modestly well. There are funds in the checking account looking for a good purpose. 

John Oliver (and I guess Oprah, too) bought $15 million of old medical debt and had it eradicated. 

The Wealthy Accountant had an opportunity to buy a $20 million package of old mixed debt, mostly credit card and medical. 

And that is exactly what I did. Most of it is out of stat and technically uncollectable. The only way to stop the debt buyers, however, is to stop the selling of the debt which is exactly what I did here.

I know it is a spit in the ocean. There are hundreds of billions of this charged-off debt floating around out there. This $20 million gesture will not even make a ripple.

Unless you happen to have an old debt in the package purchased. Then you will get a reprieve from the harassment.

The debt will sit in a desk drawer in my office gathering dust. No 1099 or tax issues because I will not officially retire or write-off the debt. It will just age. And unlike a good wine, it will stink up the office for sure.

 

Dreams

Your debt is forgiven. Wealthy accountant has a $20 million giveaway reducing debt so people can have their life back. Reduce stress and money worries. Has your debt been forgiven? #debtforgivness #debt #stress #worry #moneyproblems #suicide debthelp Packages of this old debt are always large. I have seen some small packages when I ran the hedge funds, but it doesn’t allow me the chance to game the system.

You see, I buy this debt for almost nothing. The $20 million package cost just under $50,000. Could you imagine if you could buy your old $20,000 credit card or medical debt just one account at a time for a half cent, or $100? 

If thousands of accounts were not packaged together you could pull yourself off the conveyor belt.

Most debt buyers also sell their debt. If they are selling a package of debt for 2 cents on the dollar, they usually allow you to cherry pick for maybe 3 cents on the dollar. 

If I ever get time I will build a course showing people how to track their old debt down (see who owns it) and buy just their own old debt for next to nothing. 

Until then, I did what I could.

 

 

 * The Annual Suicide Prevention & Awareness Month blog tour is technically over. Melanie Lockert sponsored the blog tour from her Dear Debt blog for three years. Her publishing schedule has become Spartan this year as her interests and focus seem to have changed. I decided to continue the blog tour solo this year. There is so much work still to be done. Money problems are a leading cause of suicide. My experiences and skills allow me to make a difference few have the opportunity to do. So I present this post in hopes that at least one is saved.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Frugal Exotic Dining

3 frugal dining options the whole family will enjoy. Home cooked meals under $5 prepared with a variety of home grown food. Even expensive meals like salmon are very low cost. #food #meals #frugalmeals #frugal #dinner frugaldining #dining #qualitymealsIt is easy to get spoiled living in the backwoods of Nowhere, Wisconsin. Cool, crisp mornings and fresh food straight from the garden. Food we don’t grow ourselves is frequently purchased from neighbors who do grow it. 

As you can imagine, the cheap quality fast food peddled in urban areas these days does not live up to the bill. Even the so-called high end (and expensive) restaurants just don’t compare to what we grow and prepare ourselves.

Going out to eat is not a treat; it is something we do when home cooked meals are not an option. 

The cost is what really bites. Dining out is expensive and rubs my frugal nature wrong. I can’t help thinking They charge that much for this! as I chew the cardboard.

There is a solution. Good food is available at a rock bottom price if you know where to look. In some cases you can’t prepare at home any cheaper. And they use high quality, real food in their preparations.

My delicate palate has found three sources of excellent value when dining out that are cheaper than virtually any other venue, save self-prepared.  

So put on your bib and start licking your lips. We are going on a culinary journey.

 

Hospital

Hospitals don’t always have edible food. However, when they do you might want to fake an illness. 

Years ago when my oldest daughter was born I made a discovery at least as important as sliced bread. Mrs. Accountant was having a difficult time of it and even under stress, I eventually knuckled under and went to the hospital cafeteria. 

And was it good! 

Once the stress of child birth passed and we settled in, Mrs. A and your favorite accountant had a discussion. Mrs. A was all for going for a meal periodically. (Yes, Mrs. A is an awesome cook, but she needs a break now and again.) 

St. Elizabeth’s Hospital in Appleton, Wisconsin is the place you want to go for lunch. Trust me. They have a variety of food to choose from, all of it prepared like grandma used to and right in front of you. 

The best part is it cost less than a fast food stomach pump meal. Most restaurant food is barely edible and here we were enjoying REAL! food for under $10 for the two of us at the hospital where they can afford to serve terrible food because medical care is really close.

There is one more best part. You don’t need a sick friend or family member to eat at the hospital. Though you sometimes have to answer questions if you see someone you know. I just tell them the truth and they always agree; it is worth visiting the hospital when you’ve worked up a powerful hunger.

Caveat: I found St. E’s by accident. I tried the other hospitals around town and found them wanting. (Note to everyone: If I ever get ill I want to be taken to St. E’s or just let me die.) Even St. E’s had a dry spell several years back. But they soon returned to top form to my delight.

I suggest you do some medical culinary research.

 

Culinary School

I hear you already. “I don’t have a culinary school near me.”

Oh, yeees yooou dooooo!

My oldest daughter (yes, her again) exposed mom and dad to this one. She was attending the technical college and made a new friend which happened to be taking classes in culinary arts.

Well! What do you know about that?

Heather (the big kid) explained to Mrs. A one day that she needed to visit her at college. Heather took Mrs. A out for lunch at the school. 

Looking for reasonably priced dinner options? Look no further. Here are 3 frugal dining out options most people don't know about. So now you know the secret! #diningout #food #dinner #lunch #secret #meals #inexpensivemealsThe real risk—if I would have known in advance—would have been to warn Mrs. A to NOT eat college food. It could make me a widower. 

That night Mrs. A bragged to me about how good the food was at the college. I checked the calendar to make sure it wasn’t April 1st before taking her seriously.

Not to let a good meal pass, Mrs. A and I made a point to visit Heather shortly thereafter. 

Heather made sure we took the correct lunch line. You see, some food is the normal college rot gut, but, if you went over here to this line is was the creations of the culinary class today. 

So we stepped into the right line.

I filled my plate (as I am wont to do, evidenced by my waistline) and figuring it would set me back $10. 

Mrs. A was in front of me. The friendly student on work-study rang up Mrs. A’s plate. $5.50!

“Five dollars!” I said a bit too loud. 

“Oh, no sir,” the kind work-study student said. “Your meal is $6.50. You have the salmon.”

Here, just take my money.

Once again, I was pleasantly surprised by the food. It looked, smelled and tasted delicious! And both of us ate for a bit more than $10! Yes the fish was slightly more, but who is complaining when it tasted this good. 

Since then I’ve had to take back all the things I said about my daughter and apologize for not paying more than a token amount of her college cost (and here to learn more).

Periodically you will hear in the nether regions of the Wisconsin backwoods, “Maawwww! I got the buggy hitched to the the horse. Want to ride with me to town to visit the yung’en?”

I highly recommend the Fox Valley Technical College in Appleton, Wisconsin if you are hungry. You probably have a similar option where you live.

 

Church

Before you say one word, bite your tongue.

From a young age on I always knew a good meal was coming when church put on a feed. It was the one thing I missed (along with the fellowship with awesome people) when I lost my faith.*

The ladies** at church know how to cook. In our parts a meal is frequently served after a funeral. On Election Day in November St. Martin Lutheran Church (Chilton, Wisconsin) has a Chili Supper each year. Easter morning is a brunch after Sunrise Service. There are many other event when a meal is also served.

 The food at church is the best of all three options I have shared here. (Yes, I saved the best for last.)  

Here are 3 budget friendly diner option the whole family will love and cost around $5. Dining out doesn't have to break the budget. Home cooked meals with real food! Bet you never thought of dining at these 3 places. #budget #budgetfriendly #meals #dining #lowcostmeals #goodfood I understand some readers don’t have faith in God, yet I never saw our church turn anyone away from the dinner table for any reason so you don’t need faith to eat. Church people are like that. Very welcoming.***

The churches love to advertise their upcoming events with meals and usually encourage the  public to attend. Keep your eyes open for these excellent dining opportunities.

I have enjoyed meals at other churches around town when they served. Even other denominations! And never once did I get a lifted eyebrow. The Catholics fed this Lutheran as hastily as any of their own parishioners. 

A church setting is about fellowship. The food is excellent. What more could you want. There is nothing to be embarrassed about. Just bring an appetite.

Next Sunday (September 15, 2019) is Bring a Friend to Church Sunday. After the service St. Martin in is having a brunch. You are all invited!

You will love the cost. Many times it is a freewill offering. Sometimes they have a token fee, but it is always so low I feel guilty and donate a bit more. I’m willing to pay for a good meal.

Looks like a certain backwoods accountant is hooking up the buggy to the horses again.

 

I hope you enjoyed my unconventional list of great places to dine at a very reasonable cost. I don’t dine out often so I’m sure I missed a bunch of great ones. Share your favorite places to eat where the food is excellent and the cost family friendly.

 

 

 * I’m working on a TEDx talk on my darkest hour that led to my loss of faith. 

 ** I say “ladies” because the ladies do most of the cooking. The men sometimes help out, but the women deserve the credit for their labor. No offense is meant, nor should it be taken.

 *** My journey back to faith is a long and arduous one. When this blog started I was still clinging to atheism and if you read closely you could tell. But I was far enough along to know lack of faith had as many issues as faith. I was coming home even if I didn’t know it. I’m busy writing a book on my journey back to faith. There is a lot to it and it isn’t all religious. Once the book is finished and ready for publication I will be giving a presentation. My hope is I can convince Valparaiso University in Indiana to allow me to make my debut public presentation there. I promise to take you to hell and back. There will be no dry eyes at the end. It will be the most emotionally draining 90 minutes of your life, I promise. I’ll share details on this blog when this happens.

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Financial Horror Stories

PROTECT YOUR CASH!!! Investments too good to be true are. Learn the language of business before investing. #accounting #investing #Buffett #WarrenBuffett # money #cash #realestate #stocks #alternativeinvestmentsMy office manager, Karen, sat with a new restaurant client. Ten minutes later Karen was in my office with the financials of the client.

“She doesn’t understand why she is losing money, boss,” Karen said. “She says business is good, but she loses money every month.”

I looked at the profit and loss statement for less than ten seconds when I asked Karen, “Is this correct?” 

Karen named the bookkeeping firm the client used. It was a reputable firm. Karen said the client reported all income daily and reported it to the bookkeeper. The bookkeeper paid all the bills and provided a statement each month.

If the P&L was correct there was only one explanation. “One or more of her employees is embezzling.”

“Can you talk with the client?” Karen didn’t know what to tell her.

I went to Karen’s office and explained to the client she had at least one employee embezzling. 

“How do you know?” she asked.

I held up the P&L. “The cost of goods sold compared to wages compared to revenue are off. Someone is either walking out the back door with steaks and seafood or someone is stealing cash receipts.”

The client assured me she had honest employees. With only a glance at her financials I was certain there was malfeasance. 

“It might be a waitress. Do people leave money at the table or take it to the checkout person?

“Checkout person.”

“Okay, it probably isn’t her because the amount is too large. And while steak and seafood might be walking out the back door, the cost of goods sold is somewhat in line with employee wages. It is revenue that is off. 

“So tell me, do you have a security camera on the cash register?”

She told me she had no security cameras. 

“The employee at the cash register might be the problem.

“No,” she said. “That employee has been a friend since we were in kindergarten.”

That was all I needed to hear. With rare exception, embezzlement comes from people you trust the most. Either a family member, close friend or the faithful employee who hasn’t taken a vacation in eight years. There is a reason accountants demand business clients require anyone in their business handling money to take a two week vacation every year. You would be surprised how much embezzlement is uncovered when someone is on vacation.

“Your friend is robbing you blind,” I confirmed.

She still insisted her friend would never steal from her.

“Okay. This is what I want you to do. Go back to your restaurant and call a meeting with your employees. Tell them your new accountant is a real a-hole and demands a security camera be placed over the cash register.”

She did as I asked. Her friend since kindergarten quit on the spot. And profits arrived for the first time at her restaurant.

Unfortunately the theft had gone on for too long and the financial damage too great. A year later she closed her restaurant, deep in debt.

 

Warning Shot

A few weeks ago I published on the Fleecing of the FIRE Community. Some readers were irritated while others were concerned. I wrote things like:

Since you managed to acquire a respectable nest egg you think you are an experienced investor. It is doubtful you are!

and

Buying into an unconventional investment, which these bike communities are, should never happen unless you are very experienced financially and have the ability the lose 100% of your money without changing your lifestyle one iota.

and

You have no idea of some of the people on my desk I’m helping. These are serious issues; small fortunes completely destroyed unless I can find a way to preserve their wealth. I don’t always win.

When I published:

To keep this short I will close with one last suggestion. If you can’t read and interpret financial statements like a seasoned accountant you have no business being in any kind of exotic investment, real estate included. Stick to index funds and money market accounts.

You might not shoot the moon, but you will not suffer a catastrophic loss sending you back to square one, as a neophyte in the FIRE community once again.

people wanted to hear some of the horror stories, hoping to learn from other’s mistakes. 

I stand by my original advice: Don’t invest in things you know nothing about. If you can’t read a financial statement how will you understand if a rental property is a good buy? Or a business?

The next time you are tempted by a slick sales pitch at a conference (this is being published while FinCon is running in D.C.) or camp, come back and read a few of these true stories. Names are changed to protect the guilty (yeah, I think I’m funny); the stories are all true.

 

Supper Club

I have a group of clients that own several businesses around town. Two from this group with several outside investors own a supper club near my office. They called me in to handle taxes and consulting. It was bad from the start.

Once they bought the supper club they hired a manager. This was a guy they knew from running some income properties they owned. 

The manager and his wife handled the books.

The club was open for a bit before I was called in. I would review the books monthly and consult before preparing the annual corporate tax return.

I was to meet with the manager. When I arrived it didn’t take long to know something smelled bad. From the front door to the bar was all it took for me to know embezzlement was rife.

The bartender game me a cold attitude. There is no reason an employee of a business client should ever give the accountant an attitude. This told me the employees knew or suspected the malfeasance. The environment was bad.

I was shown to the office where I waited as the manager was running late.

I noticed a gap in the security cameras between the back office where I was and the safe. 

When the manager arrived he was livid. He made it clear I was never to touch the books unless he or his wife were present.

After the meeting I called one of the owners. I told him he had serious misappropriation of funds issues. I told him it was the manager bleeding him dry.

I was assured the manager was a good guy. I pointed out:

  1. The bartender’s attitude was unusual to see. Employees should care less if the accountant shows up. They should have been more interested in serving me a drink, hoping for a tip.
  2. The security camera gap between the office and safe was a serious issue.
  3. Any manager who is that adamant the accountant not see the books without supervision is practically an admission of guilt. There is only one reason to control what the accountant sees.

I knew who was embezzling (manager), where they were doing it (security camera gap near the safe), when they were stealing the funds (at closing the manager or his wife handled the money with no oversight) and how much (I estimated between $100,000 and $150,000 based on revenue).

When I was not taken seriously I said I was not interested in the account and hoped it would not affect my work on their other accounts. 

A year later one of the owners was in my office. It seems I was wrong. The manager was embezzling just as I said he was, except he misappropriated at least $300,000.

I reminded my client he probably did the same when he was managing their rental properties which always seemed to lose money, too.

 

Fish Farming

The moral of the first story is: If you can’t read a financial statement you have no business being in business.

The moral of the second story is: When your accountant’s BS alarm goes off, listen.

Invest in what you understand. Know your circle of competence. It is better to pass on a good investment than to invest in a bad one you don't understand. #stockmarket #business #sidehustle #sidegig #investmentsIn the second story the business survived and even later thrived. (Though I never got the account, but never lost the accounts of their other businesses.)

Now we turn to an income property story.

This didn’t happen to my client. I was a member of the Fox Cities Apartment Association many years ago when I owned a massive amount of real estate when I heard the story.

It seems a neophyte watched late night TV when he discovered he could be a gazzillionaire buying income property no-money down and cash flow right out of the gate. 

This guy bought an up/down duplex, filled the unit and enjoyed his new-found cash flow machine. 

As winter approached the tenant called and said the furnace was not working. The landlord went over to see if he could fix the problem without calling an expensive technician. 

When he gets to his property he finds the problem right off. The basement is filled with water!

It seems the tenant wanted to raise fish. Thank God he didn’t fill the basement to the electrical panel.

The foundation of the building was shot. Insurance didn’t cover the damage because it was the tenant’s fault. The landlord sued the tenant and won, but the tenant had no money and later disappeared. 

The city condemned the property and the bank foreclosed and socked the landlord with the shortage when the bank sold at a fire sale price. The landlord later declared bankruptcy. The stress destroyed his marriage. He lost his easy money investment, wife and had to pay 29% of his gross income in child support. I have no idea how he ever recovered.

The morals of this story are:

  1. Income property is NOT easy money,
  2. Always screen your tenants (his tenant had prior litigation with landlords),
  3. Always check your property, even if you have a property manager. An annual (or more often) personal inspection is a requirement in my opinion,
  4. Alternative investments, including income property, require a reserve to handle maintenance and excess damages, and
  5. No-money down deals are rarely a great deal. They are desperate deals.

This guy did everything wrong. He bought a crap property which attracted crap tenants. He put no money down and had no reserve, He never screened his tenants or inspected his property. What did he expect would happen?

 

Bad Advice

Some readers might notice I have no hair. It’s because I pulled it all out.

What non-bloggers might not understand is that bloggers can see when other blogs link to their site. Usually I’m curious to see what is said; usually I’m sorely disappointed.

For example, a blogger once published she never has an LLC for her income properties and linked to this post of mine as her reasoning. It was a 100% misunderstanding of what I said!

I have no problem with, and even recommend, income properties be held inside an LLC. What I also say is that you should never place real estate inside an S corporation or LLC electing to be treated as such for tax purposes.

The post this blogger linked to is about small businesses and not real estate so she read it all wrong. Which leads us to our last example so I can take an aspirin to dull this throbbing headache resulting from pounding my head into the corner of my office.

 

When it rains, it pours. I’m not talking salt either.

Last summer I had two consulting appointments with the exact same issue: income properties inside an S corporation. 

Since I could kill two birds with one stone I tried my darnedest to find a solution. I even hired a law firm in California to help. Alas, nothing could be done. Once real estate is inside and S corp it stays there, regardless the negative consequences. 

No-money down real estate is rarely a good deal. Usually you are buying something with lots of problems that is hard to sell. These steps can point out the ones that are really a bargain. #realestate #investing #nomoneydown #investment #goodinvestments(If you transfer real estate from an S corp to an owner of the S corp it is still treated as a sale at fair market value, triggering a capital gain (or loss). )

There are several reason why you should never, ever, ever put real estate inside an S corp or LLC electing to be treated as an S corp. 

First, if the S corp spent any time prior as a regular corporation (C Corp) it probably has accumulated earning. An S corp with any C corp accumulated earnings and 25% or more of the S corp’s earning are passive (rent, interest, dividends), the S corp is taxed at the highest C corp rate.

I know that is a mouthful and a lot of details are disregarded. (It’s actually more complicated than that tongue twister indicates.) Regular corporations now have a flat 21% tax rate so it might not be as bad as it once was. Still, it causes an S corp—a vehicle for managing a business with fewer taxes—to be taxed at the regular corporate rate.

It also adds complexity to the tax return. Good for the tax professional (if he can keep his sanity); bad for you.

This problem is easily avoided by going straight to an S corp which many do.

The real problem—and this is a big one—involves basis.

I know basis is hard to understand, but it is of vital importance here. 

Most people understand they have basis in their S corp if they invest money into their business. What is harder to understand is how loans affect basis.

S corps are unique in that loans by the corporation do not add to the shareholder’s basis unless the loan is from the shareholder. Even if you guarantee a loan taken out by the S corp it does not add to basis!

We will not bog ourselves down today on S corp basis nuances so don’t take my next statements as complete answers; they are not.

The two clients I consulted (and latter prepared their tax returns) have serious S corp basis issues because they had real estate in their S corp and the S corp took out loans. 

When this happens it is possible to show a loss (real estate depreciation can cause a loss while still cash flow positive) and use up basis. When that happens it is possible in some circumstances to pay a capital gains tax on distributions when the S corp shows a loss. 

Accelerating depreciation can really complicate this issue. Current tax law allows faster depreciation in some instances. Repairs and improvements are deducted easier now. And cost segregation studies can super charge depreciation deductions.

When real estate is in an S corp you always have to keep an eye on basis from the corner of your eye. 

Nothing is worse than paying taxes on losses! And it can happen in an S corp when the rules are not followed.

The clients’ intentions were never to break tax laws either. They did what they thought was correct or might have even read some tax articles and misunderstood the complex issues surrounding S corp taxation.

To fix this problem I’m working with the client to verify all loan are from the shareholder. Loans are structured so the shareholder takes out the bank loan and lends the funds to the S corp. That does add to basis! (This is the opposite of what banks do so they have to be told the consequences. If they don’t listen, get a different bank!)

The moral of this story is: Always seek the counsel of a competent legal and tax professional before buying real estate and/or starting an entity.

I know people around here love saving money, but you don’t save when you make a serious tax error. A small investment in an attorney and tax professional can yield massive returns and peace of mind. 

 

Coda

Warren Buffett once recommended you focus less on business school and more on taking a few accounting classes. I couldn’t agree more.

You can’t make an investment or run a business optimally without understanding the language of business: accounting. 

While business classes are great, a fundamental understanding of accounting will serve you in every facet of your life: personal finance, investing, work, side hustle, small business.

You would be surprised at how many people doing their own books record loan payments as an expense. (The interest portion of the payment is an expense; the rest is principle which is recorded against the liability on the balance sheet.) If something as simple as this is not understood, how can you possibly trust your judgement in running the business or in any investment decision?

My original comments are correct: People have no business making investments in things they don’t understand! My buddy Warren has said at least a googolplex times. 

All these crazy ideas brought to conferences and the various FI camps are accidents waiting to happen. You can make informed decisions when you understand the language. You, like me, might enjoy making small investments in strange products just to see how it works and plays out. Nothing wrong with that as long as you understand what you are doing.

Making large investments without understanding the investment is insane. Index funds and bank deposits are what you should limit yourself to if your accounting knowledge is limited. In fact, you shouldn’t even listen to any investments offers. All that could happen is you get sold and then God help your net worth because no one on the earth will. 

It is also never too late to learn. Colleges and tech schools around the country have superb accounting classes.The great news is accounting has been around a long time is and virtually unchanged in that time. You don’t need a prestigious college for a good accounting education. Even local night classes will make you a better investor.

 

It is temping to think you know more than you do when your stash grows. Success gives the illusion of intelligence. When the crisis arrives the illusion evaporates. 

Please, kind readers, use common sense. If you don’t fully understand the concept and the financials then take a pass. Better to miss a deal than to go all-in on a scam.

 

 

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cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

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