LLC "Management Co." to write off expenses. Possible?

Question

Hello again BP! I completed my first deal last fall and now have a Duplex. I am trying to find out how to be more tax efficient. Long story short, I had an idea and was wondering if this is feasible. Any advice if greatly appreciated!! My idea:

Create an LLC. Have this LLC be the "management" co that my tenant pays in order to live here. Can I funnel the property upkeep expenses through this LLC and shelter the rental income? Even further, could I refi my personal car to the LLC and have it be a Company vehicle?

Would be great to shelter some of the rental income especially as I look into this second property soon. Thanks all!

-Andrew

Andrew Cheek · Answer

Thank you all for the tips this is why BP is great, the educated community. Thanks again, Andrew

Basit Siddiqi · Answer

@Andrew CheekHaving a management company can be a good idea...it can also be a bad idea.It really depends on what you are trying to accomplish.Having a management company does potentially create an opportunity for self-employment tax liability.If you are trying to put money away into a retirement account or deduct health insurance, maybe a good idea.

Good to talk to an accountant before you go this route.

Bjorn Ahlblad · Answer

You need an accountant; but in the meantime I will take a stab at this. From a tax perspective an LLC is a 'disregarded entity' that means it is taxed as you are. Yes, your LLC can buy cars; it can even buy your car-you just have to follow the rules. As an example our LLC pays my wife's health care. So you can funnel anything you like; but you will still be taxed as you would be-LLC or not. Anyone who invests in REI really needs a CPA to help them with LLC's, depreciation, deals, write-offs, 1031x, and taxes etc.

Andrew Cheek · Answer

@Bryan Hartlen That makes sense thank you Bryan. I'm still researching LLC's and different tax efficient strategies. I'm still in baby step mode but I'm hoping to learn how to write things off effectively before I get into more properties. Thanks again!

Bryan Hartlen · Answer

Hi @Andrew Cheek I’m not an accountant but.... LLC’s don’t really pay taxes.  They’re a liability shield not a tax shield.  Earnings and loses are distributed by the LLC to it’s members through K1’s. The members (individuals or corporations) then pay taxes on those earnings.

If you’re holding a rental duplex in your name, I would highly suggest you move it into an LLC (with the assistance of tax / legal experts) to protect any liability claims spilling over into your personal space(home, car,  investments).

If you’re investments are large enough it could make sense to create a separate S-corp to perform management services that would have some tax advantages over having those fees performed by an owning LLC.

Ryan B. · Answer

First answer... ask an accountant...

Second answer, if you don't have an LLC, or even if it is a single member LLC, then it is a pass through entity for tax purposes.  You don't need to make some LLC to be able to write off upkeep expenses.  Expenses that you have that are directly related to running your rental business are generally able to be written off.  If you car is used exclusively for your rental business, you may be able to write off the full cost.  However, if you are like most folks and you have a personal car that you sometimes use for your rental business, then you write off the mileage related to the rentals according to the IRS mileage allowance.  You don't have to refi a vehicle into an LLC to take proper deductions for it.  How a vehicle is used is what determines whether it can be written off.