Buy, Borrow, Die // Q&A
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June 27, 2022
Creating an LLC for your property
If you have a rental property, you may be considering creating an LLC for it.
LLC is a Limited Liability Company that acts as a distinct legal institution to hold your assets and protect your liability. If you ever have a suit against you that involves the property named in the LLC, the plaintiff will not be able to sue you personally; instead, it's the LLC that the liability falls on.
Opening an LLC for Your Airbnb
An Airbnb is a means of getting money on the side, but since you're not going to be there with the clients, any issue can come up, such as accidents, theft, etc.
In situations like these, you open yourself up to litigation, but if you form an LLC for the business, you can sleep better at night knowing that your personal assets are protected since Airbnb is functioning as a separate entity.
It also protects your identity if you don't want it disclosed. If you create an LLC for the business, the information displayed to the public would be the chosen name of the LLC and address, not your address and name. This can be helpful if you're scared of disgruntled guests harassing you in your home. It is up to you to structure it as you want.
Also, the tax benefits for an LLC are pretty neat. LLCs have "pass-through" taxation. This means that instead of paying two different taxes on the LLC you own and your personal income, everything is reported under your own income and taxed according to your tax bracket.
However, you should know that running an LLC requires extra operations and administrative overhead costs. Additionally, calculating tax if it has various owners can become an issue.
Owning Multiple LLCs
If you have more than one business/property that you want to keep separate, you can operate separate LLCs. And in case of liability, the other properties are protected. Also, you can write off more of your W2 income. However, the overhead cost for maintenance can be a problem. Also, it can be complex when you have to do taxes for the various LLCs.
Before deciding to own multiple LLCs, consider the maintenance cost. Each LLC will cost differently in operations and administrative overhead. You should compare this cost to what you’ll be writing off from your W2 income. If it’s just about the same, then the additional stress when doing taxes may not be worth it.
Real Estate and IRA Holdings
A Self-Directed Investment Retirement Account (SDIRA) allows you to save towards your retirement. And you can invest the funds in your SDIRA in order to grow your wealth. Popular investments include stocks, mutual funds, bonds, crypto, and real estate. You can legally hold real estate under your self-directed Individual Retirement Account (IRA).
There are two types of SDIRA: the traditional SDIRA and Roth IRA. In the Roth IRA, you can only make after-tax contributions, but the savings that go into this account and the earnings from the investment are not taxed.
However, in a traditional SDIRA, your SDIRA contributions are tax-deductible. However, you’re essentially deferring your taxes until you retire and make withdrawals.
If you choose to hold your real estate in your self-directed IRA account, you can use your IRA to get a non-recourse loan to buy property, although this may lead to Unrelated debt financing income, which is then taxable. One additional benefit you’ll get that you don’t get with traditional real estate investing is that you have protection. For example, in case of bankruptcy, you can still keep the investment in your SDIRA of up to $1million. However, your creditors can claim your traditional real estate.
There are certain restrictions that come with holding real estate in your SDIRA. They are-
● You must hire a contractor in the case of any repairs and not work on it yourself.
● You will not be able to occupy the property or sell it to family members.
● All expenditures of the house must go through the IRA account
● The tax deductions from the property cannot be taken from your tax returns
As you can see, there are a lot of rules for real estate SDIRA. You'd have to decide if it's for you, but we advise not jumping into this if you don't have any previous experience in real estate.
Buy borrow and die strategy.
The term "buy, borrow and die" was coined by Professor Ed McCaffery in the 1990s to explain how the extremely wealthy accumulate more money and dodge taxes almost entirely.
So, let us break down each of the elements.
Buy
Here, people with enough money buy a lot of assets that appreciate in value, such as real estate, collectibles, and stocks. They do this so that they will never have to work for money again. They make sure they hold them and never sell because as long as they don't sell, they won't pay taxes.
Borrow
Because these people have accumulated a lot of wealth and hence collateral, they borrow from banks which give them good deals. Think of it like this, rather than these people taking a $10 million salary and paying 37% income tax; they borrow $10 million at nothing more than 3% interest.
Die
Before these wealthy people die, they use trust funds and philanthropic donations to protect themselves and their heirs from tax. Their heirs then inherit everything, the stocks, and all their holdings tax-free. Then the heirs start the cycle again. A new generation of ultra-wealthy, tax-evading business people is born.