How To Structure Your First RENTAL Property (And Mitigate Taxes!)

Hey guys. Toby Mathis here. And today we're going to talk about how to structure your first property for asset protection and tax minimization.

All right. You guys ready to jump in? Let's do this.

First off, if you are the guy or gal sitting there going, put it in an LLC, you need to be watching because it's never that easy. You got to go through a process to break it down to determine whether that would even be appropriate. A lot of cases that would depend on the type of property, what type of investing it is, whether it's going to be held for long term, short term, is it a Airbnb RV?

Oh, is it what kind of what kind of property is that? Is it being used in your business? All of those factor in how you're going to structure this.

Now we're looking at it 10,000 foot view as asset protection and tax. I want to make sure I get all the benefits from a tax standpoint. Don't cause myself to lose any or don't cause any adverse tax consequences or depending on the type of activity if it's negatively taxed just because it's like flipping, it's an active business.

There might be self-employment tax. Is there a way for me to minimize that? All comes down to it.

So the first thing we're going to do and then we also look at it from asset protection, by the way. We're going to look at it and say, how can I make sure that I don't cause myself personal risk, like my retirement plan, my house, my RV, my cars, whatever? I don't want them coming in and taking my stuff because of what I'm doing here.

You know, so I want to make sure I'm minimizing my risk from an asset protection standpoint as well. Okay. Before we get any farther.

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Now. All right, let's jump in before this frivolity. Let's get into the meat.

Right? Right. The first thing I'm going to look at, somebody comes in and says, hey, I do in my first deal, how do I structure?

I look at it and go, what kind of do you buy in the property? Financing the property that a house hack? Is it an Airbnb?

Is it a flip? Is it multifamily as a commercial? Is it a vacation home?

Are you going to be using it to. Do you even own the property or are you just you just have the paper? Maybe you're a wholesaler.

All of those things have to be addressed and I'll break them down here in a second. Is it cash or finance? Like, maybe this is just plain vanilla.

I'm buying a single family residence, and it's going to be my first rental property. Okay, you're buying it cash or are you financing it? Well, why would that matter?

Because we have a lender we have to deal with. How do they want it to look? Are they going to be okay financing to an entity or do they want to just close in your name?

If you are financing it, then is this an asset based loan where they're not using your credit or are they using your credit or your risk on this thing? Are there other investors? All of these things have to be addressed.

So whenever you say, what's the best way to structure my real estate, everybody comes in and says, I'm going to buy a property. What's the best way to structure it? It depends.

You love that right now going do an attorney. And somebody told me, I said, you paid a few hundred grand for to get a sentence or statement that makes you millions of dollars. What's that statement?

It depends. That's how the accountants and the attorneys make their money. Right.

But we're going to break it down. We're going to demystify it for you, and we're gonna make it into little bite sized pieces so that it makes sense for you. So first off, let's assume that we're going to have lending.

And the easiest way for you to understand this is I use three C's cash, collateral or credibility? Cash. Collateral.

Credibility. Cash. If I have cash, I can borrow against it.

Collateral stocks, real estate. I can borrow against those. I could even borrow against my home to buy my my my investment real estate.

And you're going to say, whoa, whoa, whoa, whoa, whoa. But you can't write off that mortgage, then it's not it's not acquisition indebtedness. I heard that from my CPA.

Yeah, but what does it matter what the security is? Type of loan? If I'm using a loan for an investment, I'm writing it off on schedule.

I'm not taking it as a personal mortgage deduction. I don't live there. I'm using this money that's secured by my home to buy an investment property.

There's a difference. Cash, collateral. Credibility.

Credibility is me. I have a business or I don't even have a business yet. I may not even have an LLC.

I may not have any business. I'm maybe I'm buying it. I'm a flipper.

It might be a corp. I don't even have it yet. So how do I get loans for it?

Maybe they use your credibility. Maybe they're going to use your credit score. You're going to say, but then I'm on the hook for it.

Huh? Same way as if you have kids and they're 16, 17, 18, whatever it is, maybe they're buying their first car. It all goes down.

They have no credit history. Guess who gets to cosign on that? Mom or dad, right?

Or both. So here's the business. You just set up a baby business.

It's a teenager and it says to the bank and your bank or hard money lender, whatever. I would like some cash, please. They're going to say, all right.

Do you have any collateral? No. Do you have any cash?

Believe it or not, I funded a lot of businesses. I'd put cash in and I get a CD and I would lever it to get a line of credit. Then after a few years, you no longer need the CD as the security on the line of credit because it's all grown up, right?

And they no longer require the security. So I do that so that I had the line of credit that was required, no personal guarantee. So you got to kind of plan out ahead of these.

But it was always kind of fun. You get in there. So they say, Hey, do you have any cash now?

Do you have any credibility? I'm a brand new company. All right.

Then they're going to use the owner. And then you're saying, but I heard you could do asset base loans without any sort of guarantee. Right now, let's look at what you're buying.

Could you do owner finance and not have to worry about it personally? Yeah. They know the property.

They'll probably do it. But a bank, a doubtful will. Bank doesn't know that property.

The banking on that property. Banks are looking at it and they're going to say, no, I don't know who you are yet. I don't know your business yet.

We need to have some history first before we're willing to take off the training wheels. I need to know that I can get my money back because I have all these depositors that are looking to me and I have shareholders that need to get paid. So they're going to be looking at this go on how to make sure that they get paid.

Now, this does not exist when you're paying for cash, you're paying cash. You can just basically go right to the type of entity. If you are financing, then you got to go to the bank and say, how would you like to see it structured?

Now, portfolio loans when you're buying a lot of properties or maybe you're taking down a, you know, ten properties at a pop or something like that. And hey, I have really good credit. Maybe I feel comfortable doing this.

They may do a portfolio loan, they may keep you as a guarantor for a certain period of time, but more than likely, they're going to secure it with a special purpose entity. What that means is they're going to force you to go to a jurisdiction where they know that they have certain rights, probably Delaware. And they're not just going to secure their loan with the property.

They're going to say, now that's ten properties. We don't want to foreclose on ten different properties. That's too costly to get paid.

They'll just secure it with the entity. Usually they'll have one entity that owns an entity that in the entity that that is owned. So the owner is the special purpose entity.

This little guy has all the other properties and all they want is to make sure that they can take the owner of the entity that owns all the properties. Makes sense. Looks like this special purpose entity owns Real Estate LLC.

And then it has lots of properties. One, two, three, four, five, six, whatever it is. And these could even be LLC.

I actually have deals set up this way. They're all LLC. He's pointed to this one, the bank of securing it with that.

So the banks giving you the cash, let's do all the cash to go and buy all these properties that that does. But it's secured by the entity. But you don't have to worry about that, right?

Most of you guys are probably just buying one property and they're just going to say, we want you to be on the hook. We want to close in your name. We're closing everything as a personal loan.

It's the second residence. It's a rental, whatever. And they're going to tell you that you have to close in your name and you're going to immediately freak out.

You're going to be like, but I saw on YouTube all these lawyers saying, make sure that you buy in an LLC or a land trust or something. Right? Just because they forced you to close that way doesn't mean it has to stay that way.

A lot of times if there's financing, you just put it immediately in a trust. And I'm talking about a land trust. What is a land trust?

It's real simple called a guarantor trust. It's revocable. No different than if you're an individual is a living trust.

These things are the same type of trust. I'll just call it a land trust. But you have a trustee, you have your beneficiary, you have your grantor in those, right?

Plural. It could be grantors, trustees, beneficiaries. But for your purposes, just you let's just say that you bought a property.

You're the guarantor, trustee and beneficiary. We just put the property in there. The banks are going to be okay because they're used to seeing that they just won't close in it because they don't want to find out that in the 5 minutes before you signed off that you transferred your interest to somebody else.

They want to see that that property is in your name when you sign all those docs as they're coming after you, if they don't get paid, they don't want to foreclose on the property. They want you to pay whatever that loan amount is. They want you to pay it on a monthly basis and they don't want you to default.

Believe it or not, banks don't like to foreclose on things. They're not in the business of owning foreclosed property. As we saw in the Great Recession.

They did not know what to do with it. They sat on it. They had no ideas how to maintain it.

They were it was just a big old time suck for them and a big loss. And they were dumping those things as quickly as they could. You know, they went through it without destroying the market.

But so anyway, so you put that in there. The reason that you do is because the lender, if they ever asked for the document, you could show it to them and show that you are the guarantor, the trustee and the beneficiary. This is a revocable document, meaning that you can change it at any time and it's a guarantor trust, meaning that it's disregarded for tax purposes.

So when you put this in here, it's no different than you own. And that's why the banks are okay. But you're going to take this beneficial interest and you're going to transfer that into an LLC, more than likely an LLC in the state where the property is located.

And in that methodology we've created asset protection land trusts in all states except for Florida, provide no asset protection. If you're in Florida, we could actually just use the land trust. Now, a lot of you guys are probably saying, wait a second, they could call that note due.

In theory they could. There's actually the Garden Germain Act that says you can't call no do on a less than four units or below if it's being used as a as as your primary residence. So they don't know who's living there.

Maybe you could say I'm living there. I wouldn't lie to them. But what the banks know for certain is that if push comes to shove, you're probably saying I'm living there, like, I'll move there.

I'm not going to foreclose. You're not going to you know, they're in the business of having you pay. I have never seen that occur 25 years, thousands of transactions, never seen.

And I've bought properties by the way, in Vegas by taking over that beneficial interest in trustee provision on homes. In other words, put it in a land trust. The owner would pop that property in there.

They move out. I take over, make it into a rental. Nobody knows.

Banks happy to get paid. I just wouldn't spend too much mind on it. Everybody that wants to scream about this doesn't do that.

Doesn't do. What I'm saying is that they're not investors for the most part. I've seen transfers and LLC, I think a once or twice in my career, 25 years, hundreds of properties that I own individually.

And I've never seen anybody come up and say, Oh, you transfer that into an LLC, I want to get paid right now. Now it doesn't work that way. What I have seen, however, is states that if you transfer into an LLC, they'll want to tax it.

Or if you take it out of an LLC, they want a tax. I'm standing in one right now in Clark County. They tax you to remove a property from an LLC.

They do not tax you to put it in the LLC. If you have to take the property out of the LLC to refinance it, for example, the bank is still going to want to take it, put it back in your name so they can refinance it, even if they're okay. With the LLC, you're going to pay hundreds of dollars in transfer taxes because Clark County, Nevada charges when you remove a piece of real estate from an LLC.

So we're going to use that land trust quite often and we're using it for a couple of different reasons. Number one, because of the lender like we talked about. Number two, I can use a nominee trustee I could actually use if I want to.

I could use an LLC, an anonymous LLC to be the trustee, or I could use a trusted friend or an advisor or an attorney if I don't want my name showing up on it. And you're saying immediately, why would I care? Does it matter?

It might matter. Let's say that you are somebody who works in the, let's say, mental health or you're a famous person, you're an artist, all sorts of these people in my clientele, doctors, and you just don't want your patients, your friend, your ex stalkers fill in the blank. You don't want them to know about your properties.

Hey, I want to invest in properties. I don't want anybody know. Or you want to be the secret millionaire.

You want to build up your activities in the dark. I want to build up my investments outside of the public view. I don't want everybody to know what I'm doing.

You want to be that guy that walks into the place that could buy up half the town, right? Nobody knows. Nobody's treating you differently.

Nobody's hitting you up for things, so nobody's trying to take it away from you. That could be you. That's I call it security through obscurity.

Security through obscurity means that if nobody knows you have stuff, they don't generally try to take it away from you. That's why you don't see homeless people getting sued night and day for any of the shenanigans they pull. Right?

Because people are like, yeah, it's not I'm not going to get anything. But you know who they love to sue rich people love to sue rich people called frivolous suits, or sometimes they're valid and somebody will not back off. And I could give you examples all day long.

That's not the purpose of this video. But there's plenty of cases that we have internally where family member A was obscurity. Family Member B went someplace else, had their local and somebody could find their stuff.

The anonymous owner, the person that they couldn't see what else they owed, sort it out quickly. Other family member, same exact case, same exact degree of liability. A gets out early for almost nothing.

B gets stuck in the lawsuit and drug along for multiple years. And Spence, I won't give you all. They're not like sometimes it's hundreds of thousand.

Sometimes it's more it's almost impossible to go to trial without incurring hundreds of thousand dollars of expenses. Ways you can combat that, obviously make sure you have good insurance and make sure that you have an umbrella. And if you're doing this type of investing, make sure that you have a commercial umbrella.

If you have multiple properties, then a structure. You might want to talk to your agent about making sure that you're getting a little bit of higher level, where it's going to cover the structure as well as you, but inexpensive insurance, but you can absolutely do it. All right.

So let's go back to this other question I would ask. I'm putting together my first deal. We now know that if you're doing financing, chances are if it's single family, you're buying it, putting in a land trust in assigning independent, official interest.

What about if it's a flip, a little bit of a different animal now when you're flipping, you are an active trade or business. And because it's an active trade or business, you could be subject to self-employment tax. You lose the ability to do installment sales.

You can't do 1031 exchanges like there's things that are in the code that you lose the benefit of. It just means that if you're doing flip, there's adverse tax consequence this and we want to minimize those adverse tax consequences more than likely by using an LLC taxed as a corporation or as a plain corporation. Now there's other videos on this.

You can go in there and do a deep dove if you want, but I'll just use the 10,000 foot view if you're a flipper. What we care about is how many properties are you going to do a year? And more than likely you're going to look at a structure where you're going to see other entities branched off to do each flip.

So there might be LLC, LLC and each property one, two, three, four, five, six. You're flipping inside of an entity that is outside of the main entity because this is where the value is. This is where the money is going to end up.

And this would equal an S or a C Corp for tax purposes. I doubt we'd be using the land trust under that. Right.

We would just be setting up something like this in your estate. There's a way to do it with anonymity. So at higher level, beyond the scope of what we're talking about today.

But you're going to be using a tax structure as an asterisk for those of you who immediately go, wait a second, is it an LLC or an S or a C Corp? We're just going to do a quick timeout. We're just going to make the Simple Rule LLC do not exist to the IRS.

There's no such thing as a tax form for an LLC. The IRS. You just tell it what type of entity you want it to be taxed as it can be disregarded.

Hey, just ignore it. Tax it to me, make it a partnership, make it an escort, make it a C court. It can even be a trust for tax purposes if that's what owns it.

So you just going down and just basically telling the IRS, Hey, it's an LLC, but I want it to be taxed as an escort. Perfectly fine. Why would you do that?

Because the S corp gives us an avenue to pay yourself a salary interim and to avoid self-employment tax on a bunch of the other income. Also in California. Yet you have really horrible franchise taxes, an LLC.

So if you want to minimize the amount of franchise tax that you're going to be getting hit with, you're probably going to want to look at making that LLC taxed as an escort. But the idea here is just that we're isolating out the flipping properties. Sometimes we're isolating them out from the parent.

If you're doing a lot, if you're just doing one, it might be just having one entity and you say, I'm only going to use one. Maybe I'll do 21a year, something like that. We might use the same entity.

I would tell you the best practice is to use a separate once that if anything ever comes back on you, liability wise on from your flip, you know, somebody buys it. Five years later, it's been owned by two other people and they sue everybody that's in the chain of title. You want to make sure that that's a separate entity than the one that might be sitting on a bunch of cash at the time.

What if I am an Airbnb now? We're getting interesting. So an Airbnb, if the average rental is seven days or less, is also considered a trade or business.

It's not a rental property seven days or less, it's a trade or business. So your losses, if you know how depreciation works, could be ordinary loss. If you're if you're the one running the place, you could actually offset all your other two income.

And if that's the case, I'm probably owning that thing in an LLC. In that case, I'm going to get rid of all this stuff and I'm just going to say, Hey, if I have an Airbnb and I'm just going to run it, I'll probably just put it right into that LLC. Or if I'm financing it, Land Trust and then enter the LLC.

One of the other, the reason being is I'm going to make this a disregarded entity or a partnership entity, but I want it to flow onto my tax return. If I am operating an Airbnb and I can get those losses, that's option number one. Hey, I could still do that.

Option number two, you're not going to run your Airbnb, you have other rental properties and you kind of want to qualify as a real estate professional or you want it to be rental income. What we do in that case is you buy it. Same scenario.

We use the land trust. You're kind of seeing how this lingo goes, LLC and then you lease it to an S or C Corp. Who then does the short term rentals?

This is the Airbnb entity. I know that's a lot for you guys to digest. Again, there's videos on these topics just by themselves, but what this does is it makes the short term rental.

This is going to the guests that would go into the S corp and then it would be reduced by the amount of the lease payment paying that cash. And what that does is it keeps this as rental income for you. You're not going to have self employment income, but you could also combine that with the other rental properties to become a real estate professional, if that's what you're shooting for.

And I know that's a topic that some you guys have never heard about. Again, lots of other videos on how real estate is taxed, but what this allows us to do is to separate those things out. Sometimes.

So that's what we do. Now, the last category I'm going to hit and realistically, a lot of you guys might start off doing this, especially if you're just getting going, is you might be house hacking. House hacking is not destroying a house, but house hacking is taking a house that has multiple rooms that you're going to live in and maybe renting out a couple of the rooms that way that they're paying for your rent.

It's a house that you reside in and there's a portion of it that's being used by guests. You know, you might rent it long to somebody. You might have two roommates or a roommate or three or four, whatever the numbers might be.

Right. And I know the temptation would be like, well, those LLC is we'll just we'll put the room in an LLC doesn't work that way. Right.

You have one parcel possibly one address. What you might do is give each of the rooms a number and what you can do there. It's not perfect, but you could take the property and again you're going to get it in the LLC.

That's what we want to do is we want to get an LLC for protection, but you might be using that land trust and in that land trust we might be specifying what the actual units are and separating them out. If we wanted to, we could put them into separate LLC, but more often than not, what we're doing here is we're putting it into an LLC, just like a rental property. You're renting out the rooms, you have a liability for the whole thing, like it's your house.

But the good part is you don't lose your capital gain exclusion, what they call a 121 exclusion when you sell the home, you're still going to get it on the portion of the home. That's where you live as your primary residence. And the other portion, you're also going to get to depreciate.

You're going to get some tax benefits while you're living there. You're going to have rental income coming in and you're going to get to offset that with depreciation. No different than if you were just renting that out.

But this is where I would do it. I wouldn't be getting too cute. The other thing I have seen and we do this in states where they're serious LLC or wherever, it's easy and I create a bunch of series.

LLC is 1 to 3 and I have multiple properties on a on a parcel. I might have the different addresses going here. So like let's say that you bought a single parcel and you built ten mini houses on it, many homes, you could absolutely take those.

And Sarah, each address I'm going to assign an address to a separate series or a separate LLC, either one, depending on the values. I don't see this come up too often. We do it a few times a year, but that's another thing you do.

You can actually put a term on the deed. You know, you could actually go tenant in common if you really felt like it. But more than likely what you're going to do is you're going to put it in to a land trust, and the land trust is going to specify which unit you're going, where into which LLC.

You can absolutely do that. So whatever the case, there's kind of a workaround. So that's if your house hacking, if it's a vacation home last kind of category I'll hit is all right I have a vacation home.

It's the second home. I'm there for two or three months, then I'm renting it out same structure I'm putting in an LLC, probably using my land trust again because I more likely have personal financing unless I'm getting the cash out of my other property. Like maybe if I take it out of my home and I use it to buy another property, then I'm looking at there's kind of funky rules.

14 days, 10% as to whether or not I am going to have to separate out the rental use of that home from the personal. In the example I just gave you using it during the summer, you're definitely going to fall into that. And what you're doing is taking a portion of the years, how many year, how many days was it rented versus how many days was it available to my family, to me?

And did I use it? You know, and those are not those are your right. Was it for me, you know, do I keep it from June 1st to September 1st?

That would all be personal use all of those days. And then once I make it available for lease, then I'm looking at all those days as the investment days and I'm doing proportionate deductibility on the things like depreciation, repairs, property taxes, I'm apportioning them. But from a liability standpoint, I still want to get it out of my name.

Last thing I'll say on liability, there's two sides to the liability. There's things that could happen inside the home. So we put the house over here, bad things happen there, gets trapped inside the LLC, that's inside liability.

So I'm going to say that is inside, but what about stuff that I do? You do want to be cognizant of outside liability of you, your family, maybe you have some kids and you want to make sure that you know your kids, teenagers, they're driving. You want to make sure that people cannot come in and take these.

So while I'm talking about your first property, sometimes we're going to look at your activities outside of it. Maybe you're a doctor, you have personal liability, you're in a high risk profession. Your divorce lawyer, everybody likes to sue the divorce lawyers.

Nobody's happy when those things are done right. Where whatever the case I do construction, plumbing, fill in the blank and somebody comes after you. You want to make sure that you put your assets behind a firewall.

There is a way to do it. I would use under these circumstances, I would create one more layer in that last layer might be an LLC in the state of Wyoming that nobody can see and nobody can pierce. And the reason I do that is because if they ever go this direction, they cannot take that LLC, they cannot take it away.

Whereas my LLC in my state. So you're in California or you're in a state that allows piercing is pretty easy or that's very literal as far as, hey, you did something will take whatever you own, including your your business assets we'd look at that easy fixes on all of that is a you could put it together Wyoming LLC. Other things is to make sure you're covered in the event somebody comes after you, to make sure you have a an umbrella policy that's covering you in addition to your typical insurance.

Like always carry insurance for being a landlord, but also make sure that you have an umbrella to cover you in the event something's not covered underneath that policy, you're really just looking to make sure that there's enough money there to cover lawyers and to settle things that if it's possible to settle. And that's what we're looking at it. All right.

So I've covered a lot of ground in there's very simple how to structure your first property for liability and tax purposes. We hit on a lot of different topics. I know that.

So I'd always encourage you to go into our YouTube channels myself. I have a partner, Clint Coons, that has a very good channel as well. Go in there and take a look and look at things all together.

Or we also teach workshops. Generally speaking, twice a month you can actually go in the tax and asset Protection Workshop, generally free, go in there and take a look at it and get even a little bit of a deeper dove and then start narrowing down, you know, figuring out what you're doing and again, this is what's so funny is if I just said, what's the best way to structure your first property for asset protection and tax planning? A lot of people just go, Oh, I'll see why.

You know, forget everything else. And hopefully you have an appreciation that the reason that the actual correct answer is, is it depends, is because it's so fact specific to where you're located, what your situation is as as an individual, what type of assets you have, what your risk tolerance is, and what type of activities you're you're engaged in. All of those things help lead us to make sure that we're making the best decision for you to keep more money in your pocket and to minimize risk and allow you to grow everything.

And I'd be remiss if I didn't say this and wrap it all up. And eventually an estate plan to create a legacy for your family and I say that at the very end because I just want to plant that seed. A lot of my clients look at the 200 300 year plan about what they want their estate to look like that in that time frame, and it makes such a huge difference on your planning now when you realize that you're creating something that's going to be perpetual, you do that.

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