How do you, tax efficently, move money between your REI entities?

Question

Hello All,

I am still a relatively new buy/hold investor, but over the past 2 years I have put together a small portfolio of 13 doors.  Although I am fairly comfortable with the mechanics of buy/hold, I am still trying to figure out the best way to move money between various "internal" entities.

I am still getting conventional loans that are generated under my name for MFR properties.  However, I have placed my properties into an LLC and I have a S-corp to handle management tasks.  This seems to be a pretty standard set up on BP.  What I am trying to better understand is how money should move between the organizations ESPECIALLY when it comes to tax time.

Currently, it seems that loans from banks need to be generated under my personal name, LLC's are the entity to hold the property, and S-corps are the way to go if you are doing activities like management.  I realize that there are on going discussions about taking the personal loan (HELOC or otherwise) and then transferring the property at a later point to the LLC.  Assuming that I don't want to take the risk of the bank activating the "due on sales" clause, and I keep the loan in my name, but the property in the LLC, what is the most tax effective way to move money around these entities?  Do you just call the initial money to buy the property "capital investment" and just leave it in the LLC?

I am assuming that the tenants should write checks out every month in the name of the LLC.  Additionally, since the loan is in my name, the banks will send out the interest payment info out with my name on it at tax time.  This leaves me with a situation where the income is going to one place, but the tax benefits are going to another.  I am trying to figure out this dilemma.

As for getting money into the S-corp, I am assuming that either the LLC or I personally should be "paying" for services based upon some simple contract.

Any insight would be greatly appreciated!

-Arlen

Rob Beland · Answer

So by "13 doors" I assume you have 13 separate units. All single family rentals?  At that level you have already set up an LLC and an S-Corp. I don't know what the dollar value of your monthly rentals are but regardless, it seems like you have set up a lot of paperwork, filing fees, accounting fees, legal fees, bank fees, and extra taxes for yourself. Maybe I'm completely wrong but I own 26 units spread over 6 properties. I hold all properties in a simple real estate trust that I set up because somebody told me to. Actually it's my wife and myself that are the trustees and we are also the beneficiaries of the trust. The trust really does nothing and there is no tax return associated with it.

I file my standard 1040 and a schedule E for each property. I do have my RE license so I file a Schedule C for a small amount of brokerage that I do which allows me to deduct expenses for technology (cell phone, software, etc...) a portion of my homes expenses for my home office, and some mileage. These expenses can't be put on the Schedule E.

I have never even considered setting up an LLC or an S-Corp never mind one of each. I self manage all of my properties and have been doing this for about 15 years. I've never taken a paycheck for any of the services that I provide to myself.

I go to a bank, get a loan, and buy a property. I have one checking account for all of my rentals that is separate from my personal account. I also have a savings account that I use for reserves, money for quarterly tax payments, etc...

I guess I wish you the best with your dilemma as I can't really offer you any sort of advice other than shut it all down. Unless somebody can give you a financial reason to do what you are doing, why are you doing it? You are effectively making less money with all these entities and tax returns and filing fees.

Just my thoughts @Arlen Chou

Rob Beland · Answer

At your level of income/investment @Arlen Chou the likelihood of an audit by the IRS is less than 1% so it really doesn't matter what you call it. You can call it a loan between the two entities and set up an amortization schedule and make monthly payments. It's not income if you are just moving the money. Income is generated when you provide a service. It doesn't matter whether it's the Llc or the S-Corp or you individually, it's all your money. Just make sure you know how much you have and how much you are spending on your business. At this point in the game you can call it a banana fund and the IRS won't even know what you are talking about.

Arlen Chou · Answer

@Rob Beland@Curtis Bidwell@Gita Faust@Beth L.@Bryan Otteson@Tom Spaeth

Thank you all for contributing.  I did open up the LLC and S-Corp for potential liability issues.  But what I am trying to understand is the actual cash movement from the properties to the S-Corp and what to call that on the taxes.

My current set up is as @Gita Faustsuggested, with a loan showing in the LLC for the purchase price of the property.  The property is held within LLC's and the tenants do pay into the S-Corp.

What is not clear to me is what this money flowing into the S-Crop is considered, is it "income" for the S-Corp?  If the loan is in my name, how do you use the tax credit against interest paid?

Thanks again,

Arlen

Bryan O. · Answer

The primary reason to set up LLCs and S-Corps are related to liability, not taxes. Having all properties in your name without anything else makes you a prime target for one frivolous law suit to take everything you own, including the house you live in! Most LLCs are "pass-through" so there is no numerical change to your taxes.

The others are correct that rent payments need to be made to the management company.

Gita Faust · Answer

Sorry Rob - unless one knows your investments, full financial's personal and business along with your tax return - you need a Advisor.

You will have to consult with your Accountant that to who has a niche in Real Estate and Property Management.

My husband changed my way of thinking. Took him a while - You get what you pay for.

Good Luck.

Rob Beland · Answer

@Gita Faust as an accountant would you offer your input on whether or not forming an LLC would result in the investor making more money than setting up a simple SP?

Gita Faust · Answer

Disclaimer: Check with your accountant.

Our clients have the similar concept:

-- when you get a loan on your personal name

------ on the LLC books - it will show a loan to you personally (not the bank)

------ make all payments from the business account

-- LLC you do not need a Balance Sheet for tax return unless you are a multi member LLC

Arlen, Did you not say you have a S-corp as a management company?

-- If so all the tenants should pay the rent to the management company.

-- put your property management hat on for the S-corp. and you will have the answer. It is just like letting someone else manage your property.

Gita Faust

Tom Spaeth · Answer

I would assume that you have or should get a good accountant. They would be best at answering these questions rather than us amateurs. All my mortgages are in my name and show up on the LLC taxes. This is no real issue. Since I have a full time job the S-corp really wouldn't do me much good so I don't have much input there. Without the S-corp I know the LLC taxes/income pass thru to the SSN holder. Therefore transferring money between LLC's is no issue. Loss in one is a gain in another, so therefore a wash.

Curtis Bidwell · Answer

@Arlen Chou I would agree with @Rob Beland unless you are in partnership with other people.  Much like you, we financed in our individual names, but ran our business through the llc's because we had 4 partners.  All the rents, mortgage payments, evictions, small claim filings we're in the names of the LLC.  (Mortgage company doesn't care who the payment comes from as long as the title doesn't change).

The LLC is a pass-through entity, so all the income/losses 'pass through' to the  members via a K-1 which goes to your 1040.

In your scenario, I would have payments sent to the Scorp (they are managing), the SCorp pays or bills the LLC, which then distributes to the members (preferably through an equity draw which is nontaxable).

Check with your CPA to confirm any direction you are considering.

Beth L. · Answer

@Arlen Chou How it is that you can own the properties in the names of LLCs and have the loans in your personal name?

How do you, tax efficently, move money between your REI entities?

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