Patrick specializes in real estate taxes and tax planning/advice. He’ll give us multiple strategies that we can use to grow our wealth as real estate investors, and pay minimal taxes LEGALLY. We’ll learn a good amount about what the corporate veil is, why it’s important, what it means to “pierce the corporate veil”, and how to avoid doing that. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Patrick Camuso Background:
- Founder of Camuso CPA PLLC, a real estate business advising company
- World class experience in investment management and real estate space and consulting for the world’s premier asset managers, real estate companies and retailers
- Leverages advanced knowledge and experience in tax and accounting to serve his top clients
- Based in Charlotte, North Carolina
- Say hi to him at https://www.camusocpa.com
- Best Ever Book: Tax Free Wealth
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TRANSCRIPTION
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluff.
With us today, Patrick Camuso. How are you doing, Patrick?
Patrick Camuso: Hey, Joe. How are you doing? Thanks for having me on, I appreciate it.
Joe Fairless: My pleasure, nice to have you on the show. A little bit about Patrick – he is the founder of Camuso CPA PLLC, which is a real estate business advising company. He leverages advanced knowledge and experience in tax and accounting to serve his clients. He’s based in Charlotte, North Carolina, and you can check out his company’s website in the show notes, just by clicking that link. With that being said, Patrick, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Patrick Camuso: Absolutely, Joe, and I do appreciate that introduction, as well. As you mentioned, I’m the owner of Camuso CPA. We’re a multiple service CPA firm located in Charlotte, North Carolina. We’re serving clients right now in about 12-13 different states. We’re heavily focused on the real estate industry, as you mentioned; about 80% of our clients are involved in the real estate industry at various levels.
Our wheelhouse is helping clients setting up their portfolios, as well as working with them on a year-round basis with tax minimization strategies.
Joe Fairless: Alright, well let’s talk about some of those tax minimization strategies… Let’s pretend we’re an investor who’s just starting out. What are some questions we will likely have for you and what are those answers?
Patrick Camuso: The first question that I would be looking to get a handle on if I’m consulting with a new investor is what their strategy is for investing. Really, the big determining factor for me is finding out whether or not their business is gonna be active or passive. If you find someone that’s fix and flipping properties, that’s usually gonna be treated as an active business. Someone who’s holding rental properties, we treat their properties as a passive business.
Joe Fairless: Okay, so number one – identifying if they’re active or passive.
Patrick Camuso: From that, it’s really gonna determine what the optimal entity structure is for that investor. Obviously, this is a scenario where we’re looking at someone just starting out; they’re not creating a multi-entity structure.
So if you’re dealing with a passive investor, they’re either gonna form a single-member LLC, or they’re gonna form a partnership to get flow-through treatment on the passive income. That’s gonna give them the most advantageous tax rate from that perspective.
For active investors, their income is going to be exposed to self-employment tax, so as opposed to going into a partnership or single-member LLC structure, what I recommend for investor in this regard is to form an S corporation, because when you form an S corporation, one of the biggest tax planning benefits to being in this structure is shielding a portion of the income that you make from self-employment tax.
Now, the caveat that I will give to investors in this regard is that if you do go into an S corporation structure, there are additional compliance costs to being in an S corporation, so these need to be considered in addition to the tax savings that would be associated with it.
Joe Fairless: Like what, for example?
Patrick Camuso: If you’re a single-member LLC, you’re basically only gonna have to file a personal tax return with a few additional schedules on it. If you go into an S corporation, you’re gonna have to file an additional tax return that’s more complex and more time-intensive than filing a personal tax return… Since you are determining a reasonable wage to pay yourself, it’s recommended to all my clients that you substantiate the ways that you’re paying yourself with a reasonable compensation study, which also will be an additional cost come tax time.
When you’re in an S corporation, there are additional tax planning benefits outside of minimizing the amount of income that’s exposed to self-employment tax… So you may wanna work with a CPA more closely in tax planning within the corporation. And finally, there is more of an administrative burden on having an S corporation as well, just because you have to be much more careful about not co-mingling funds when you’re moving money in and out of the corporation.
Joe Fairless: Okay. I imagine that might seem daunting to a beginning investor who is just getting set up, so what would be steps that they need to take in order to make this all happen, to get them set up properly?
Patrick Camuso: The thing with the S corporation structure with investors that are starting out in that regard – I did highlight that you wanna make sure that the tax planning benefits are gonna outweigh the costs of moving into this structure, so I usually recommend clients looking at electing S corporation once they’re at about 60k-70k gross revenue. At that point it makes sense for me to sit down and crunch their numbers and really determine it down to the penny if it is gonna make sense for them or not.
Any time you’re working with a CPA, they should be able to relay the actual benefits over the costs to you to moving into an S corporation structure. All too often I do see clients get moved into this structure too early, to where they can’t afford to administer it correctly, and that either leads to them getting burned financially, or just not handling the company correctly and then having further compliance issues down the road.
So firstly, I recommend electing S corporation status when it does make sense for a cost/benefit perspective, and then at that point I recommend working closely with a CPA, a firm like Camuso CPA, to handle all of your tax and accounting needs related to S corporations.
If you elect that within the threshold that I mentioned, all the costs will be outweighed substantially by the tax benefits that you would realize.
Joe Fairless: And if you have a single-member LLC, you can convert that into an S corp, right?
Patrick Camuso: Yes, and that’s a great point to touch on. When you form a single-member LLC, you have the first two-and-a-half months from when you formed the LLC to elect S corporation status. Additionally, you have the first 2.5 months of every calendar year to elect S corporation status, so within those timeframes you can file form 2553 and make the election.
Additionally, throughout the whole entire year you still can make the election. You have to make a retroactive election, which does potentially pose additional penalties and fees, but again, if your income throughout the year makes sense from a tax planning perspective, where the tax is gonna outweigh the cost, then we also recommend retroactive elections to clients.
So if I’m working with an investor who’s just starting out with fix and flips and they’re not gonna be able to readily anticipate where their income is gonna be at, I recommend that they start with a single member LLC, and check back with me in two months. Most likely, they’re not going still to be able to determine what their salary is gonna be for a year, which [unintelligible [00:07:56].17]
At that point, I recommend “Let’s do another check-in in six months, then ten months”, and we see where they’re at in terms of their income, and I’ll run projections on the benefits and the costs of doing a retroactive S corp election.
That to me is the best approach for setting clients up for tax minimization without moving them into an entity structure that’s gonna impose an additional compliance cost on them too early in the game.
Joe Fairless: I started out with an LLC, and then I converted it to an S corp, as I went further along, based on my accountant’s recommendation… So I’m listening to you and I’m shaking my head, “Yup, yup, that’s exactly what I’ve been told”, and that’s why I converted it from a single member LLC to an S-corp.
Patrick Camuso: Absolutely. The last thing that I would mention is that some investors are utilizing multiple strategies in the market. Maybe they’re doing fix and flip and they’re also doing buy and holds – then I do recommend holding those in two separate companies to minimize the liability and also not nix the various forms of income from a tax perspective as well.
Joe Fairless: Will you elaborate on buy and holds in a single-member LLC, and why we should do that?
Patrick Camuso: Sure. The reason that you want to structure them in a single-member LLC or partnership is just so you can get pass-through treatment, and it’ll just flow through onto your personal tax return, and you’ll only have to pay tax on the income, as opposed to self-employment tax. That’s the reason why if you are doing fix and flips and if you are doing buy and holds, I would recommend putting them in separate entities, so the income is co-mingled and all treated as active income, and it’s exposed to self-employment tax.
Joe Fairless: Okay. So if we’re a fix and flipper who is then taking some of the profits from every third or fourth fix and flip and buying a buy and hold, then we should have separate entities to own the property buy and hold, versus the fix and flip company.
Patrick Camuso: Absolutely. And to that point as well, whether you have one company or two companies and you do establish articles of incorporation, then you set up your different bank accounts onto your company’s EIN and you set up your operating agreements, what you’re doing is you’re establishing what’s called a corporate bail for your company, and you always wanna make sure that any income related to the specific that it’s coming from or any expenses that are coming out of that specific company stay in their specific bank accounts to maintain that corporate veil. Because when you are utilizing different strategies, it is imperative to maintain the separate companies, to maintain the separate companies, to maintain distinctions between the incomes.
Joe Fairless: You said corporate veil… Will you elaborate on what that is?
Patrick Camuso: It’s a legal term, and all that it really represents is a clear demarcation between you as a person and your company that you set up; it sets a clear line between the two. And you do that 1) by filing your articles of incorporation, 2) by drafting an operating agreement, and 3) by establishing separate bank accounts and credit cards and financial records for your company, and then making sure to not co-mingle funds, which means mixing personal and business accounts together.
Joe Fairless: Why is it important to not co-mingle the funds and mix personal and business together?
Patrick Camuso: If you’re owning a single-member LLC, it’s not gonna have as much of a negative impact as if you’re in an S corporation or if you’re operating multiple entities. When you’re owning a single-member LLC, the only purpose that being in an LLC is serving is liability protection. So if you do co-mingle funds and you do have an issue where you find yourself in court related to one of the properties that are in this company, you may face the potential of people being able to come after your personal assets, because you’ve eliminated the corporate veil of your company.
Now, once we get into an S corporation and setting a wage and distribution for yourself, we have to make sure that we maintain a corporate veil so your whole entire S corporation isn’t disqualified and then all of your income will be exposed to self-employment tax.
Joe Fairless: So it could be a double whammy.
Patrick Camuso: Yeah, when you’re in a single-member — it’s really just from the liability perspective, but once you get into an S corporation, then it does become an issue from a tax perspective as well.
Joe Fairless: Based on your experience, what is your best real estate investing advice ever?
Patrick Camuso: I’m sure that the best piece of advice is probably one of the most common, and that is to build a strong network around you and a team of advisors. At Camuso CPA we like to think of ourselves as the financial part of your real estate team, and that is an imperative piece. But in addition to that, building a strong team of both colleagues and peers, and just a network of real estate professionals is really what I see as the driving success factor for investors.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Patrick Camuso: Absolutely.
Joe Fairless: Alright, then let’s do it. First, a quick word from our Best Ever partners.
Break: [00:13:10].14] to [00:14:15].00]
Joe Fairless: Best ever tax planning book that you recommend?
Patrick Camuso: The Tax Planning Guide For Real Estate Investing is really one of the best that I recommend, and it’s a very general title. I would have to look up who the author is.
Joe Fairless: Okay, Tax Planning Guide For Real Estate Investors?
Patrick Camuso: Yes.
Joe Fairless: Okay. That’s not Tom Wheelwright, is it?
Patrick Camuso: That is the author. And the other one is The Logic Of Subchapter S. That would be for someone that’s more technically inclined and is really looking to learn the in and outs of subchapter S corporation taxation.
Joe Fairless: What the heck is a subchapter S?
Patrick Camuso: It’s like when you form an S corporation, that’s the tax code that you’re operating under… So reading that would give you more of an idea of the nuts and bolts of the company. But if you don’t wanna get into those types of details, you could always Camuso CPA as well.
Joe Fairless: Okay. And the book you were referencing, is it Tax-Free Wealth, by Tom Wheelwright?
Patrick Camuso: That’s it.
Joe Fairless: Okay, sweet. Yeah, that’s a great book. What’s the best ever story you have about helping a client lower their tax basis or lower the amount of taxes they pay?
Patrick Camuso: One interesting strategy that I’m able to employ on a few different occasions with investors that people like is if you find a fat pattern of, say, a high W-2 earner that’s married to someone that doesn’t have a job, maybe they’re a stay-at-home parent, opening up some real estate investments in the stay-at-home parent’s name, and then qualifying them for the real estate profession status, which allows them to take in unlimited amount of losses against all of the income that they generate on their personal tax return. That’s something for investors that are looking to get the ball rolling and maybe are still working the job and supplementing an income for a family – that’s something that’s beneficial for them a lot of times.
Joe Fairless: Okay, I wanna make sure I understand this… If we’re making a high income and we have a spouse who is stay-at-home or just not making much or at all of an income, then buying an investment and putting it in the spouse’s name who’s not making much or any money, which will then qualify them as an active real estate investor, and then that helps with taxes?
Patrick Camuso: Yes. With the spouse, it’s better if they have no job, because you do have to qualify them as a real estate professional if your losses are going to exceed a certain threshold, which [unintelligible [00:16:46].10] $25,000. The scope of the real estate professional status is probably a whole other episode, which I’m always happy to do, but mainly there is an hours requirement, that you do have to meet a 750-hour requirement and it has to be your main activity, among a lot of other criteria.
Joe Fairless: Got it.
Patrick Camuso: But if you can qualify someone for that, they can count all of their losses against their income, so it’s a powerful strategy for someone that has a partner that can qualify for that and is filing [unintelligible [00:17:16].15]
Joe Fairless: Okay, great strategy. Thanks for sharing that. What’s the best ever way you like to give back?
Patrick Camuso: I like to white-water kayak, so I find myself helping to train some of the younger children that are at the center… More on an ad-hoc basis, but just being able to do something that I like and informally help out someone that is also inspired by the same things that I am.
Joe Fairless: Best ever way the Best Ever listeners can get in touch with you and learn more about your company?
Patrick Camuso: The best way to both learn more about my company and also to get in touch with me would be to go to CamusoCPA.com. If you go to the Contact page you’ll see all my contact information there, and if you go to the About Us page when you cruise our site, you’ll get a very good perspective on what our company is able to offer.
Joe Fairless: Patrick, we’ve been talking for about 25 minutes, you’re based in Charlotte, North Carolina, there’s no way you’re from Charlotte… You’re definitely from New York or somewhere in the North-East, correct?
Patrick Camuso: Yes, sir.
Joe Fairless: Where are you from? Jersey?
Patrick Camuso: I’m from the North-East, originally from North-Eastern Pennsylvania, up in the Poconos, which is a country setting. I went to school in Montclair State New Jersey, and before moving down to the Charlotte area I worked about five years in the New York City offices [unintelligible [00:18:41].03] accounting firms.
Joe Fairless: I know my accents… [laughs]
Patrick Camuso: I do stick out like a sore thumb with the accent…
Joe Fairless: Well, Patrick, I enjoyed our conversation… Thank you for talking through in detail multiple things. One, as a beginning investor, what entity should we choose; we talked about if we were doing buy and hold properties, then most likely LLC. If we’re doing fix and flip, most likely S corp, but we’ll need to look at the revenue that we’re generating – if it is 60k-70k gross revenue or above, then most likely it makes sense to do an S corp. Then the piercing the corporate veil and how not to do that, the things we need to keep in mind, as well as that last tip about a powerful strategy if you’re filing jointly and you have a spouse who does not have a job, so that he/she could become an active real estate person and get those benefits on properties that are purchased.
Thanks for being on the show, great stuff. I hope you have a best ever day, and we’ll talk to you soon.
Patrick Camuso: Thank you very much.
