Do I need a LLC to deduct expenses?

Question

Good evening BP! Does one need a LLC or any other business entity in order to claim rental property related deductions on taxes? I recently acquired an occupied rental property in NC under my own name and am curious if I need to start thinking about setting up a LLC or not. If so, how can I utilize a LLC to claim deductions on my taxes? In NC, you need a brokers license to obtain a property management license which I do not have, therefore the LLC cannot be a property management company. What else can it be or do I just not need a LLC? I’m planning on buying 4-5 more properties in 2019 and am trying to setup the proper infrastructure now. Any guidance would be greatly appreciated!

Bill Hampton · Answer

I recommend that you hire a tax accountant that specializes in working with real estate investors. Good luck and let me know if I can be of assistance.

Brian Bradley · Answer

@Navid A. The LLC can be a property holding company. When setting it up talk to both your lawyer and CPA. You will need to swing one way or the other in what you want. Do you want to set up the LLC for asset protection and limiting personal liability, or for tax deductions and for tax purposes. The difference will be in how the Operation Documents and Articles of Incorporation are drafted. Like @Scott Smith said, LLCs and Series LLCs are great for asset holding companies, and the Series LLC for placing each asset into its own personal child series. If you want to go more tax advantages and S-Corps are great for limiting self - employment taxes etc like @Mike S. said. When creating an Asset Protection system it is going to be created tax neutral, yet will have tax benefits, but that is not the purpose of an asset protection system. But asset protection lawyer will work with your CPA or their network of CPAs to help on the tax side. Try to think short and long run. If plan on growing properties etc you will increase your exposure and risk. Get Insurance, possibly an umbrella policy also, then talk to your asset protection lawyer like myself or scott or some of the other ones that are active on this site about your options on the Series LLC or LLC option and your CPA. Its a team effort. DO NOT DO THIS YOURSELF> like @Anthony Wick said talk to your CPA who specializes in real estate investing for taxes and your lawyer for the legal side.

Scott Smith · Answer

I would agree with the above comments. While you don't need an LLC to deduct expenses (there are other entities that can accomplish this also,) the LLC will help you separate your liability. The only thing I would add is that your future properties will increase your risk for lawsuit. I would definitely look into finding a good insurance policy to start with, then talking with an attorney about options to protect your assets.An option that fits well with having multiple properties is the Series LLC, which is a structure that functions under a single EIN and allows for streamlined operation, but can still separate each property as a separate entity in regards to liability. Not directly pertaining to you question, but this is a good tag-along question for when you do talk with your attorney and CPA.

Brian Bradley · Answer

@Navid A. the only thing I would add in relation to the Series LLC specifically is to really know your states LLC Internal Liability Shields and judgment orders, and then how those relate to the individual child series of the Series LLC. Since the Series LLC is an LLC, its first going to be attacked by piercing the veil like a standard LLC. The next issue will be if a judgment is entered against you, what will happen with the bleeding? Will it stretch into the other child series or not? NC does not yet have a Series LLC so if investing in just NC you need to know this relation to the protection of each child series and be ok with it. The uncertainty is with the States that do not have a Statutory Series LLC and if those states will uphold the child series protection if a judgment is entered. No cases have made it this far into the lawsuit and either do not get filed, or settled very fast due to the cost to get through the protection system. If you are going to or considering investing in a state that does not have or recognize a Series LLC, it is something to think about when making your decision. I still really like the Series LLC, and the have been in existence for a long time, since the existence of the traditional LLC. If a poison pill existed to kill it, we would know about it by now and it would be all over. The fact that no such poison pill exists is the point and power of the Series LLC for any state as investors all over the nation use them. The only uncertainty that people talk about and the point they are getting to is regarding what happens if a judgment is entered in a state that does not recognize the Series protection structure, and or an activist judge does not uphold the Series LLC structure? You unfortunately cannot control the unknown of activist judges that do not follow the law. The only true protection from that is to go foreign with a Cook Island Trust.

Navid A. · Answer

Thank you all for taking the time to reply and offering your advice, much appreciated. Since the property is currently under my personal name, the LLC wouldn't be able to "manage" the property since the LLC doesn't own the property. In NC, you can only self manage your own properties without a broker's license. Sounds like it's best to keep things as they are for now until I acquire more properties, when liability becomes more of an issue.

Anthony Wick · Answer

@Navid A.Nope. Schedule E attachment will work for taxes. But I would definitely consult a CPA and not do your own taxes.

Keith Meyer · Answer

@Navid A. I believe you're considered a default Sole Proprietorship with your investment property, and you can deduct expenses as such. As others have mentioned here your liability would be reduced through an LLC, but as they're typically taxed as a pass through I doubt it would impact your taxes much.

Mike S. · Answer

LLC (taxed as partnership or pass-through disregarded) are mainly used for asset protection. They are usually tax neutral.C Corp are often used to get fringe benefit and retirement plans.S Corp are used usually for flippers to limit the self employment taxes.Also, check your state statutes, as some will allow you to have a management company without needing a management or broker license if you are managing only your own properties.

Bob B. · Answer

The answer is NO.

Bob B. · Answer

@Navid A. Congratulations on your purchase. Now is the time to sit down with an accountant or CPA