Posts in: September

How to Properly Use Credit Reports to Screen Tenants

September 27, 2016 Asset Protection, Litigation, Real Estate, Small Business Comments Off on How to Properly Use Credit Reports to Screen Tenants

Experienced landlords and property managers understand the importance of carefully screening prospective tenants and anyone who has had to go through the process of evicting a tenant knows how cumbersome the eviction process could be.  The ability to screen tenants based on their credit report and/or score is an important tool for landlords to better understand the character of the individual or individuals you intend to rent to, and to assist in identifying potential risks of doing so.

Moreover, information from credit reports can be used to verify or confirm information provided by the prospective tenant in their rental application.  For these reasons, I recommend running credit checks on all prospective tenants, but keep in mind that there are rules imposed by Federal (and possibly state) law that must be followed when a decision is being made based on credit history, which includes the following requirements under federal law:

  1. Landlord must obtain the prospective tenants written consent to obtain a credit report or credit score.
  2. If the Landlord intends to take adverse action based in any part on information in a prospective tenant’s credit report or credit score, the landlord should provide a notice of adverse action to the tenant in writing. Examples of potential adverse actions that would require an adverse action notice if based on credit history or score include:
    • Requiring a larger security deposit;
    • Requiring a co-signer or guarantor;
    • Requiring advance payment of rent; or
    • Rejecting a prospective tenant.

If the adverse action is not based in any way on information on a credit report or credit score, then no adverse action notice is required.

  1. An Adverse Action Notice, under federal law, must contain the following information:
    • A statement that the landlord’s decision was based in whole or in part on information contained in a consumer credit report;
    • The name, address and telephone number of the consumer credit reporting agency which furnished the report to the landlord;
    • A statement that the prospective tenant has a right to obtain, within sixty days, a free copy of the applicant’s report from the credit reporting agency identified in the notice; and
    • A statement that the applicant has the right to dispute the accuracy or completeness of any information contained in the report from the credit agency.
  1. If the adverse action is based on a credit score, the notice must contain the following:
    • The numerical credit score used to make the decision;
    • The range of possible scores used by the ratings agency;
    • Up to four key factors that adversely affected the credit score;
    • The date when the credit score was created; and
    • The name of the person or entity that created or provided the credit score.

States may have additional or more stringent requirements than the above.   For example, in California, if a prospective tenant paid a “application screening fee,” they are entitled to a copy of the credit report upon request.

Under federal law, a landlord that willfully fails to comply with these requirements could be liable for actual damages sustained by the prospective tenant, or statutory damages between $100 to $1000 in addition to possible punitive damages, legal costs and attorneys’ fees (15 U.S.C. § 1681n).  Moreover, federal law also gives the Federal Trade Commission and/or state attorney general authority to enforce compliance with the law.  Additional information about landlords using credit reports can be obtained from the Federal Trade Commission website at www. ftc.gov.

Having a uniform set of guidelines, standards and procedures during the tenant screening process, and properly using credit reports and scores as a tool to evaluate prospective tenants are important steps to choosing the most qualified and stable tenant for your rental.

Putting the Pieces Together: Tax, Asset Protection, Small Business Law, Real Estate, Raising Capital, Self-directed IRA Law, and Estate Planning

September 20, 2016 Business planning, Real Estate Comments Off on Putting the Pieces Together: Tax, Asset Protection, Small Business Law, Real Estate, Raising Capital, Self-directed IRA Law, and Estate Planning

As an Attorney at KKOS Lawyers, I work under Mark Kohler and Mat Sorensen, the managing partners of the Firm.  Mark is also a CPA and advises clients in the areas of small business tax planning, asset protection, etc.  He has written books on these subjects (Lawyers are Liars – a great book on asset protection, What Your CPA Isn’t Telling You – excellent for small business tax strategies), and The Tax and Legal Playbook – maybe the best one, an excellent summary of many applicable aspects of tax and legal planning).  He speaks across the country on those subjects and is truly an expert.  Likewise, Mat wrote The Self-Directed IRA Handbook – the seminal book in the self-directed IRA industry.  He speaks across the country and is the expert of experts in that industry.  They both practice in these areas and have helped literally thousands of small business owners and investors in these areas of the law for many years.  They both even host a radio show and put out a weekly newsletter on these same topics.

Working under Mat and Mark, I accordingly advise clients in the areas of tax, small business, asset protection, estate planning, real estate, raising capital and self-directed IRA’s/401(k)’s.  Clients are interested to find out how that works.  Actually, these areas of the law complement each other very well and are intertwined in many ways.   Like most things in life, the law as applied to your situation is not always perfectly compartmentalized into one specific practice area and requires a bit of a holistic approach.  It is not uncommon for a client to approach us for one particular issue and begin to appreciate the more holistic approach.  Here are a few examples, in no particular order:

  1. The Small Business Owner Client. KKOS Lawyers is known as the Entrepreneur’s law firm.  Many small business owners have come to KKOS Lawyers for initial help with entity structuring (s-corp, c-corp, LLC, etc.) in terms of both asset protection and tax liability.  Like any small business owner, they are always looking for legitimate tax deductions (hiring the kids, health care, travel, auto, dining, retirement plan deductions, etc.) and legitimate ways to save on self-employment taxes.  It would be typical that they have one or more business partners, in which case we would help them draft partnership agreements, buy-sell agreements, etc.  On the topic of contracts, we would then help them use contracts appropriately in their business including licensing agreements, vendor contracts, franchise agreements, employment contracts, waivers, etc.  At any point in time, they may acquire another company or be acquired in which we may help structure the deal in the best manner possible in terms of tax and legal liability.   They also may need to raise capital for their business in which case we would advise on the pros and cons of raising capital through financing, additional partners, or investors, possibly through a “Reg D” offering or even crowd funding.  In terms of real estate, for any of our brick and mortar clients, we have helped many of them draft/negotiate their commercial lease.   We have many small business owner clients in the real estate industry generally, including brokers, lenders, property managers, and syndicators. Regardless of their industry, hopefully they have a SEP IRA or 401k for the tax benefits and depending on their industry of expertise, they may decide to make alternative investments into real estate (see #2 and #3 below).  Finally, these clients spend many years building a business and want to make sure they have a sound exit strategy, which might be to sell the business to a third party, to a business partner, or pass the business on to the kids.  This leads to making sure they have an estate plan that encompasses business succession (see #5 and #6 below).   So you can see that with just one client, KKOS Lawyers can help them in terms of tax, asset protection, contracts, raising capital, real estate, self-directed IRA’s/401k’s and estate planning.
  1. The Self-directed IRA/401k Owner Client. Many clients come to KKOS Lawyers primarily for guidance in the area of self-directed IRA law for their alternative investment into real estate, privately held companies, precious metals, etc.  Without proper guidance, this type of investing is fraught with peril including prohibited transactions and UBIT (unrelated business income tax).   They may also ask for assistance with setting up an IRA LLC for their self-directed retirement account investments.  The typical self-directed retirement account investment consists of real estate in some form or fashion.  This leads to a review or draft of a real estate contract whether it is a purchase contract, a lease, or loan documents.  It is also common for our clients to invest their retirement account into a fund/syndication in which case they will ask us to review the private placement memorandum and other “Reg D” documents involved in that investment.  Frequently, the topic of asset protection comes up in terms of these types of retirement accounts (see #5 below).  Additionally, these accounts require a beneficiary designation and we will advise clients on the beneficiary status as it relates to their estate plan in terms of required minimum distributions (RMD’s) and inherited IRA’s and IRA Trusts for example (see #6 below).  Not to mention that many of these self-directed IRA investors are also small business owners (see #1) and may in fact be investing through a self-directed solo 401k, which can be setup by KKOS Lawyers.
  1. The Real Estate Investor Client. We have many clients who are real estate investors.  As such, they invest in long-term holds, short-term flips, and everything in between.  This typically entails a conversation about asset protection and LLC’s as well as tax matters including the pros and cons of being designated a real estate professional for tax purposes.  It also entails various contracts that we will either prepare or review including contractor agreements, joint venture agreements, purchase contracts, wholesale contracts/assignments, promissory notes, security instruments, warranty deeds, and commercial and residential leases.  The manner in which our clients acquire real estate is also very diverse and includes subject to deals and seller financing.  Not to mention that a number of our clients are investing in real estate in a tax deferred way either through a 1031 exchange or through a self-directed retirement account.  It is also typical that our real estate investor clients invest in a fund/syndication and that requires reviewing the private placement memorandum and “Reg D” documents.  Lastly, we discuss making sure all of these real estate assets don’t get stuck in probate court upon their death and might recommend a combination of both a revocable living trust and LLC’s as appropriate to help with that (see #6 below).  As previously mentioned in #1, many of our clients are brokers, property managers, lenders, etc., or have some business they own in real estate and are also investing in real estate in some capacity on the side.
  1. The Real Estate “Dealmaker” Client. We have a number of clients who are fund managers, i.e., syndicators.  The primary issue with these clients is to advise them when securities law is implicated and the various legitimate ways to structure deals without implicating securities law.  In the former situation, we have helped these clients properly form a fund/syndication in order to comply with securities law including private placement memorandum and “Reg D” documents.  This includes knowing the requirements of when advertising is allowed and when only accredited investors are allowed, including self-directed IRA investors.  These fund managers, like any other business owner have business partnership issues and may need protection including non-competes and buy-sell agreements as well as the need for proper entity structuring in terms of both asset protection and saving taxes (per #1 above).  Lastly, like all of our clients, they want to ensure their hard work doesn’t get inadvertently dragged through probate court upon their death, hence proper estate planning including business succession and dealing with estate tax issues (#6 below).
  1. The Asset Protection Client. The client whose most pressing need is asset protection is typically a high net worth individual.  One of the first items we’ll discuss is the differences and similarities between asset protection and privacy, and also the difference between legitimate asset protection and fraudulent transfers/conveyances to avoid creditors.  We’ll discuss their assets and the appropriate level of protection in terms of insurance, trusts, and charging order protection entities.  Asset protection and estate planning often go hand-in-hand because what often times is effective protection from creditors is also effective to minimize estate taxes.  Many of these clients own significant real estate (#3 above) and/or are business owners who also need tax planning and business structuring per #1 above and/or have a self-directed IRA (per #2 above).
  1. The Estate Planning Client. We have setup thousands of estate plans for business owners, real estate investors, and other individuals and families.  Of course the primary objective of estate planning is to pass assets to loved ones efficiently and minimizing tax (legitimately), including estate tax, gift tax, and generation skipping transfer tax.  It seems as though almost every estate planning client owns real estate in some form or fashion (per #3 above) and also a retirement account (see #2).  Many of our estate planning clients are also small business owners (see #1).

In sum, these areas of the law are interwoven in a real way as illustrated above by a few “types” of clients.  If you are a small business owner, real estate investor, or otherwise need assistance in the areas of self-directed IRA law, asset protection, tax, small business law, raising capital, real estate, or estate planning, please contact our office.

Divorce and Taxes – What You Need to Know to Avoid Getting Burned by Uncle Sam

September 12, 2016 Law, Tax Planning Comments Off on Divorce and Taxes – What You Need to Know to Avoid Getting Burned by Uncle Sam

Going through a divorce can be one of the most emotionally and even physically draining events in life.  The process of sorting out child custody issues, dividing assets, and deciding how much child support and alimony are to be paid can take months in the courts, cost tens of thousands in legal fees and costs, put tremendous strain on all kinds of relationships, and cause enough stress to shave years off your lifespan.

While all of this is certainly hard enough, you may not be aware that a divorce also fundamentally changes your relationship with everyone’s favorite government agency – the Internal Revenue Service.  If you have recently divorced, are going through the process of divorcing right now, or are feverishly taking notes on your spouse’s many atrocities for use in your impending divorce petition, then here are the “Magnificent Seven” tax issues related to divorce you will be glad you know:

  1. Child Support. If you are on the receiving end of child support payments, the money you receive is not taxable income.  On the flipside, if you are making child support payments, the amount you pay is not tax deductible.
  2. Alimony. Unlike with child support, if you get alimony from your former spouse, that money is taxable in the year you receive it. However, keep in mind that alimony is not subject to tax withholding, so you may need to increase the tax you pay during the year to avoid a penalty.  To do this, you can make estimated tax payments or increase the amount of tax withheld from your wages.  If you are paying alimony to a former spouse, you can deduct the amount you pay, as long as it is paid pursuant to a valid divorce or separation decree.  Alimony payments are above the line deductions, which means you get to take them before you get to your adjusted gross income and they reduce your taxable income whether you itemize or not. Any voluntary payments you make outside a divorce or separation decree (because, yeah, that definitely happens a lot) are not deductible.  To get the deduction, you must enter your spouse’s Social Security Number or Individual Taxpayer Identification Number on your Form 1040 when you file.
  3. Spousal IRA.  If you get a final decree of divorce or separate maintenance by the end of your tax year, you won’t be able to deduct contributions you make to your former spouse’s traditional IRA. However, you may be able to deduct contributions you make to your own traditional IRA.
  4. Changing Your Name. If you change your name after your divorce, it is critical that you notify the Social Security Administration (“SSA”) as soon as possible.  You will need to file Form SS-5, Application for a Social Security Card.  You can get that form online at ssa.gov.  The name on your tax return must match SSA records.  A name mismatch can cause problems in the processing of your return and will very likely delay any refund you may have coming your way.
  5. Special Marketplace Enrollment Period.  The last three of the “Magnificent Seven” are brought to you courtesy of the Affordable Care Act (the “ACA”) – you may know it as ObamaCare. If you lose health insurance coverage due to a divorce, the ACA still requires you to have coverage for every month of the year for yourself and the dependents you can claim on your tax return.  However, you don’t have to wait for the next Open Enrollment Period to obtain coverage. Your divorce will afford you a “Special Enrollment Period” during which you may enroll in health coverage through the Health Insurance Marketplace at healthcare.gov or your state-specific website.
  6. Changes in Circumstances. If you have purchased health insurance coverage through the Health Insurance Marketplace, you may get advance payments of the premium tax credit. If you do, you should report changes in circumstances to your Marketplace throughout the year.  These changes include a change in marital status (i.e. a divorce), a name change, a change of address, and a change in your income or family size.  Reporting these changes will help make sure that you get the proper type and amount of financial assistance.  This will also help you avoid getting too much or too little credit in advance.
  7. Shared Policy Allocation. If you divorced or are legally separated during the tax year and are enrolled in the same qualified health plan as your former spouse, then you and your former spouse must allocate policy amounts on your separate tax returns to figure your premium tax credit and reconcile any advance payments made on your behalf. IRS Publication 974, Premium Tax Credit, has more information about the Shared Policy Allocation.

Contrary to popular belief, the IRS isn’t out to get you – well, unless you’re a conservative group seeking non-profit status.  The IRS website (irs.gov) really does have a lot of helpful information on many topics, including this one.  For more information on how divorce may affect your taxes, take a look at IRS Publication 504, Divorced or Separated Individuals, and for information tailored to your specific situation, please speak with a qualified accountant or tax attorney.