How do landlords pay themselves?

[John Kaspar]

So, long story short....how? 

I'm close to closing on my first property and realized that I haven't heard about this in any of the podcasts. So, that being said. HOW does a landlord pay themselves?

[Michael Seeker]

@John Kaspar - I typically reinvest all of my proceeds, however there are numerous ways you can pay yourself.  The best way to do so will depend on your business structure as well as your personal tax position.

If you operate an LLC, then you'll use some combination of a salary and distributions. I do not take any salary from my businesses (typically results in higher taxes) so any payments I receive are via distributions from the LLC.

Here's an example:
I own ABC LLC which has net cashflow of $50K during 2017. ABC LLC has taxable income for 2017 of $15K after taking into account depreciation. Regardless of whether I take a distribution, the $15K of taxable income flows through to my personal return and I have to pay taxes on it. Let's say I'm at a 30% rate, which means I'll owe $4,500 in taxes for 2017 which have to be paid to the IRS regardless of whether or not I get paid from the LLC. Note, the LLC is not paying taxes, they are passing the income tax liability to owners even if cash is not distributed.

From here, I could decide to "pay myself" enough to cover my tax liability...I would then have ABC LLC distribute $4,500 to me. If I also happened to be in the market for a nice used car, I might have ABC LLC distribute $24,500 ($20K for a car and $4,500 to pay taxes).

There are scenarios where you may want to explore a salary, but it's unlikely that would benefit you as you are just getting started.