Who Is Jeff Watson?• Ohio Bar Member for 19 years

• Full-Time Attorney with an active trial/hearing practice

• Real Estate Investor since 1993

• America’s “Top Short Sale” Lawyer

• Co-founder of Realeflow LLC, Strategic Real Estate Coach, Inc., and Venture Land Title LLC

• Frequent guest speaker at various RE Investors meetings.

• Legal Counsel to Nova Star Real Estate Brokerage Ltd, Sharp Concepts Realty LLC & Eagleville Bible Church Inc.

“Lawyer To The Gurus”

To Inc. or to LLC

C Corp

Sub “S”

Established precedent

Know Liability Shield

Tight Ownership Rules

Rigid Profit Distribution

More Record Keeping

SM LLC

MM LLC

Newer & Evolving

Uncertain at Times

Flexible Rules

Creative Profit Distribution

Less Record Keep

Entity Basics

• What is an entity? An entity is a business organized according to state law to limit the liability of the owners. Entities can be corporations, limited-liability companies (LLCs) and limited partnerships (LPs). All provide much greater asset protection when compared to a sole proprietorship or general partnership.

MultiMember

LLC

Sub S. Corp

SingleMember

LLC

VerbalPartnership

Limited Partnership

WrittenPartnership

C. Corp

Sole Proprietor

Assets$$$

MultiMember

LLC

Sub S. Corp

SingleMember

LLC

VerbalPartnership

Limited Partnership

WrittenPartnership

C. Corp

Sole Proprietor

Assets$$$

Creditors Easily Attack

MultiMember

LLC

Sub S. Corp

SingleMember

LLC

VerbalPartnership

Limited Partnership

WrittenPartnership

C. Corp

Sole Proprietor

Assets$$$

Sub “S” Corp Basics

• What is an S corporation? An S corporation is a corporation that has elected to be taxed as a flow though entity (similar to an LLC or LP). The “S” also refers to an IRS code section.

Sub “S” Corp Basics

• The S election allows the shareholders to be taxed only at the individual level instead of at both the corporate and individual level, thus avoiding the double taxation like the C corporation.

Sub “S” Corp Basics

• The S corporation still provides limited liability protection and is a good entity for many business situations.

“C” Corp Basics

• What is a C corporation? A C corporation is a corporation that is taxed at two levels. First, the corporation pays corporation taxes on corporate profits. Then, with any money left over, the corporation may distribute profits to the shareholders.

“C” Corp Basics

• These profits, or dividends, are taxed to the shareholders. Thus, resulting in “double taxation”. The “C” refers to an IRS code section. Despite the double taxation, C Corporations offer many planning and benefit opportunities.

LLC Basics

• What is a limited-liability company? A limited-liability company (LLC) is also a separate legal entity formed for limited liability and asset protection purposes.

LLC Basics

• The owners of an LLC are called members and the management is referred to as managers. LLCs are frequently used for holding real estate and other personal assets.

LLC Basics

• Single member means one owner. Taxed on a flow-through basis usually via Schedule C

• Potential for higher audit risk.

• Greater risk of mismanagement due to lack of business formalities.

Employee or Independent Contractor

Control EquipmentDuties

Location Hourly/Job

Just “Agreeing” may not be enoughJust using “1099” not enoughCan they go Broke or get Rich

Question or Fact

I.R.S. HAS Final Say

Liability Insurance Basics

1.Interview several independent Agents2.Home based Business Rider

A simple & cheap “must do”3.Umbrella Liability Policy

Affordable Legal Defense4.Basic General Liability Business Policy

Auto owners insurance5.Improve and maintain properties

Cash Flow is Critical

Active Income“Passive” Income• Rent• Dividend• Owner’s Profit

Truly Passive IncomeMoney Making MoneyIdeas Making Money Money & Ideas Making More Money

Increase Cash Flow by Lowering

• Expenses

• Taxes

Here ‘s Some Specific Ideas to Help You:

You can deduct the cost of a business expense

if it meets the criteria of ordinary and necessary

and it is not a capital expense.

Start-up Cost Deductions

You can deduct up to $5,000 in start-up and $5,000 in organizational costs for the first year of business. These deductions apply to expenses paid or incurred after Oct. 22, 2004. The rules differ if your costs exceed $50,000. Expenses that are not deducted can be amortized over a 180-month period, which begins when you open your business. You can write off or amortize market research, advertising, employee training, business-related travel, legal advising and other costs.

Entertainment Deductions

The IRS doesn't mind your mixing business with pleasure – within reason. You can deduct up to 50 percent of entertainment expenses for unreimbursed business meetings. The entertainment must be within a "clear business setting" (such as at a conference) or should immediately precede or follow a business meeting. If you are self-employed, the 50 percent deduction limit does not apply.

Travel Deductions

Travel expenses are tax-deductible. The IRS recommends keeping a log of your expenses and receipts. Transportation, (airfare) lodging and even dry cleaning can be deducted, and half of any business meals. You also can deduct expenses for business associates traveling with you. You can't write off expenses for family members or friends if they accompany you, unless they are employees and are professionally involved in the business end of the trip.

H.I.N.T.

What is H.I.N.T.?

High Income No Taxes

Self-Directed Account

Many People hear about itSome know about itFew actually do itWall Street Keeps it SecretFew Custodians allow itComplex Rules U.S.C. 4975

Some of What Your S.D. IRA Can Do

Flip Houses• REO’s• ShortSales• Probates• Rehabs

Lend Money• Secured• Unsecured

Borrow Money• Non Recourse• U.B.T.I.

Own/Lease

• Houses

• Mobile Homes

• Land

• Oil Wells

• Equipment

• Businesses

LLC’s

Partnerships

C Corp’s

• Notes

New

Defaulted

Roth Magic

If you left a Roth IRA with just $30,000 in an account earning 10% annually to an eight year old child, the distributions over the child’s lifetime would total over 5.5 million

Completely Tax Free

ROTH Magic

The owner of a 500k Roth IRA dies leaving a 20 yr. old as beneficiary. If the account only earns 8% yearly and the beneficiary chooses to take distributions over her lifetime, based on IRS tables the distribution would total over

14,000,000.00 Tax Free

I Pity Trust Fund Babies

•Lawyer’s in Control•Taxes at High Rates

Trust Fund Babies Drool

Roth “Bennies”Rule

More ROTH Magic

Greg, Jeff, Tracy & Lorri meet each other at an event

Each has 15,000 in Roth IRAEach needs Working CapitalEach Loans from IRA 5,000 to other 3

Each loan/note at 21% annual interestAnd contains 8% Profit participationClause1 year maturity/option to renewAware of “Step” Transaction Rule

After 1 Year

Greg’s LLC Earns/net 150,000

Jeff’s LLC Earns/net -0-

Tracy’s LLC Earns/net 75,000

Lorri’s LLC Earns/net 60,000

After 1 Year

Jeff’s get cancelledGreg look for better dealLorri & Tracy renew 1 more year

R.O.I.’s 93% to 173% TAX FREETAX FREE

INT % P.P.

Greg’s IRA earned 3,150 10,800

Jeff’s IRA earned 3,150 22,800

Tracy’s IRA earned 3,150 16,800

Lorri’s IRA earned 3,150 18,000

Short Sale Deal

• Marty Buys at $178K

• Marty Sells at $200K

• No Realtor• $22K Profit…Right?

WRONG!!

• $22K Profit – WRONG!

• Marty has partners!– FED– STATE– LOCAL

Short Sale Deal

$22K becomes $11K

Same Short Sale Deal

Smarty Buys at 178,000

Smarty Sells at 200,000

No Realtor

Held House 21+ Days

22,000 Profit

All Tax Free

Did Deal

Inside Roth IRA

More to come tomorrow…

Module 1 - Types of Accounts and Basic Rules of Self Directed

Accounts

Chapter 1 - Tax Deferred Account•Traditional IRA

Structural RulesCode Section

•HSA'sStructural RulesCode Section

•401k'sStructural RulesCode Section

•SEP'sStructural RulesCode Section

•SIMPLE'sStructural RulesCode Section

Chapter 2 - Tax Free Accounts•Roth IRA

Structural RulesCode Section

•Roth 401kStructural RulesCode Section

Chapter 3 - Custodian Selection•A Few Choices•Selection Criteria

ReputationExperienceLocation/Time ZoneWebsite functionalityPhone service quality

•Fee vs. ServiceWhich matters more?

Chapter 4 - Setting Up Self Directed Accounts•Opening the account with the selected custodian•New accounts

ConversionsQualified plansRe-characterizationRe-convert

•Rollovers•Transfers

Module 2 - Detailed Study of Rules Unique to Self-

Directed Investing

Chapter 1 - Eligibility and Contributions•Traditional IRA's•Roth IRA's•401k's•Regular Roth 401K•HSA's

Chapter 2 - Account Conversions•Qualified Plans to Traditional IRA•Traditional Converting to Roth•All, Some, or None

Chapter 3 - The Rules for Self-Directed Accounts

•Prohibited Investments•Disqualified Persons•Prohibited Transactions•Distributions

Chapter 4 - IRA-Owned Entities

Module 3 - Tax Free Living Before 59 1/2

Chapter 1 - Gifting From Existing Accounts

•Annual Exemption

•Unified Credit

Chapter 2 - Inherited Accounts

•Qualification Rules5 Years59 1/2Required minimum distributions

Chapter 3 - Purchased Beneficial Interest

•Delicate DetailsLocating accountsPhrasing

•Most powerful words you will ever say - Win-Win Opportunity

Documenting the purchasePaying for the beneficial interest

•Terms and Conditions•Protections•5 Years•59 ½•Required Minimum Distributions

Module 4 - Understanding the Paperwork Components

Chapter 1 - Direction of Investments•Completion•Processing•Handling

Chapter 2 - Contribution Forms•One Time•Systematic

Chapter 3 - Distribution Forms•Funding Deals•Cash to Others

ConsiderationDeal expenses

•Cash to You

Chapter 4 - Contractual Components•PSA's•Contract Addendum•Notes•Mortgages•Options•Contracts•Deeds•HUDs•Opinion Letters

Chapter 5 - Who Signs What

Module 5 - Structuring Deals Part 1

Chapter 1 - Real Estate•Rehabs

FSBOREO

•FlipsShort SaleREOFSBO

•RentalsResidentialCommercialBuildingsMobile Home Parks

•OtherRent-to-Own dealsLease Options, etc

Module 6 - Structuring Deals Part 2

Chapter 1 - Paper•Tax Liens•Tax Deeds•Notes

DiscountedNewDefaulted

Chapter 2 - Personal Property•Deals on Wheels•Internet Assets

Chapter 3 - Necessary Paperwork•Contracts•Titles•Notes