January 11, 2007 KKO Lawyers “Choosing the Right Entity For My Business” “Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do?” Taught

January 11, 2007

KKO Lawyers“Choosing the Right Entity For My Business”

“Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do?”

Taught by:Mathew N. Sorensen, J.D.

S. James Park, J.D., LL.M.

www.kkolawyers.com856 South Sage Dr., Suite 2, Cedar City, Utah

Telephone 435.586.9366 / Facsimile 435.586.9491

© Kyler Kohler & Ostermiller, LLP 2006

Disclaimer- Although the information contained in this Presentation may be extremely useful and helpful, please understand that the presentation of this information does not constitute an attorney-client relationship. Moreover, the information contained in this Presentation is for general guidance only. It is strongly recommended that each individual or entity obtain their own legal advice, particularly applied to their own set of circumstances, facts and specific situation. Kyler Kohler & Ostermiller, LLP is not responsible or liable for any advice that is taken and applied in a situation without direct consultation and representation specific to that individual’s or company’s needs.

Instructor Notes

© Kyler Kohler & Ostermiller, LLP 2006

Sales &Operations

SmallBusiness

Sole- Proprietorship

NO ENTITY

100%

Rentals

SoleProprietorship

Ordinary IncomeSchedule C

Passive IncomeSchedule E

Pros and Cons:

Easy to set up but no asset protectionand no tax benefits.

Sales &Operations

XYZ Enterprises, Inc.

C- Corporation

Rentals

“C”Corporation

Issued Dividends

C-CorpTax Return

1120

Notes:

Provides asset protection, but has major drawback of double taxation.

33% 33% 33%

Sales &Operations

XYZ Enterprises, Inc.

S- Corporation

Rentals

“S”Corporation

Flow Thru Dividends (“Net Income”)

S-CorpTax Return

1120S

Notes:

Works well for sales and operations.S-Corporation allows you to minimize self employment tax. Also used for shortterm real estate.

33% 33% 33%

The S-CorporationSalary/Dividend Splitting

Sole-Proprietorship

Limited LiabilityCompany S-Corporation

100kRevenue

50kExpenses

50kNet Income

Self Employment Tax 15.3%

$7,500 (approx)

Before regular income taxand itemized deductions

100kRevenue

50kExpenses

21,750kDividend Income

No Self Employment tax on the Dividend

$3,327 SAVINGS!! (approx)

Before regular income taxand itemized deductions

25kSalary

3,250kEmployment taxes

•This is sample of what one taxpayer may choose to report as payroll. Each taxpayer should analyze their individual situation for the amount of payroll that is appropriate.

Sales &Operations

XYZ Enterprises, LLC

LimitedLiability Company

RentalsLimited

Liability Company(“LLC”)

Flow Thru Income

LLCTax Return

1065unless

SMLLC

Notes:

Protects the business owner from the businesses liabilities. Primary benefit is asset protection.

33% 33% 33%

Sales &Operations

XYZ Enterprises, LLC

“Series” LimitedLiability Company

Rentals #1

“Series”Liability Company

(“LLC”)

LLCTax Return

1065unless

SMLLC

Notes:

Gives you the benefit of having multiple LLC’s and having separate treatment for each series within the LLC. Allows for one tax return.

Rental #2Rental #3

Sub-Series#1

Sub-Series#2

Flow Thru Income

Family Limited Partnerships

Farm landRaw Land

Mom, Dad and/or Childrenas Limited Partners

Charging OrderCharging Order

Firewall From “Inside” and “Outside” Liability

Notes:

Excellent asset protection entity. Allows for protection from inside and outside liability.

Family Limited

Partnership

General Partner

(LLC/Corp)Shell

Limited Partners

Rental Property

Option 1

IRA$$

SDIRA$$

Raw Land

- No Debt- No LLC/LP- No Partners- Direct Investment in name of IRA

Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do?

Qualified Money and Real Estate


Option 2

IRA$$

SDIRA$$

Rental Property(Income Producing)

Non-RecourseLoan

MortgageCompany

- Non-Recourse Debt- No Personal Guaranty- No Sweat Equity- No LLC/LP- No Partners- Direct Investment in name of IRA



Option 3

IRA$$

SDIRA$$

Rental Property(Income Producing)

Non-RecourseLoan

MortgageCompany

- Non-Recourse Debt- Single Member LLC- UDFI tax- No Personal Guaranty- No Sweat Equity- No Partners- Direct Investment in name of IRA

SingleMember

LLC



Option 4

IRA$$ SDIRA

$$50%

Limited Liability Co.

orLimited Php.

IRAOwner

40-45%

MortgageCompany

Guarantor

Rental Properties

3rd PartyOwner

5-10%- Recourse Debt - YES- Partners -YES- LLC/LP- Yes



Option 5

Self Directed401K or Defined

Benefit Plan

50%

LimitedLiabilityCompany

MortgageRental Properties

Bs. Entity

- Defer up to $44,000in 2006 in 401K

- Contributions vary forDB Plan

IRAOwner

40-45%

Guarantor

3rd PartyOwner

5-10%


Self-Directed Plan Compliance Issues

• Must be Real Estate Operating Company if the Retirement Plan and IRA Owner own more than 25% of the LLC/LP See 29 CFR Section 2510.3-101

• Can’t have 100% control of LLC/LP

• Prohibited Transactions Transactions with Prohibited parties Use of Property Compensation of IRA owner

• Administration duties Annual report/valuation to Custodian Bookkeeping and tax return

BEWARE!!This is not a comprehensivelist, and also requiresa properly drafted Company document!!


UBTI and UDFI

• Unrelated Business Taxable Income (“UBTI”)•Exemptions for rental income, interest income, gains from sale of property other than property held for sale in the ordinary course of business.

• Unrelated Debt Financed Income (“UDFI”)

• Two Tier Analysis

• Real Estate Professional / Dealer Status

• Debt is the key calculation

• Trust Tax rates

• 990 Tax Return for IRAs, 5500 for 401ks

** This is only a survey of points to consider, these rules must be studied and implemented with care.


Documents

January 11, 2007 KKO Lawyers “Choosing the Right Entity For My Business” “Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do?” Taught