Rental Property Investor · Jersey City, NJ · Member since 2011 · 1k+ posts · 876 votes
My wife and I are looking to put our RE holdings on an "active" business footing, form an LCC (or one per held property?) and file taxes as a business rather than filing a form E. We have several reasons for doing this, from protecting our assets to establishing me as a RE professional as a way to exclude our RE business from financial aid assets. I do spend 750 hrs a year in RE and have no W2 income, though my wife does. But even so, we don't currently have passive losses so presumably the IRS will not take undue interest in us if there's no avoided taxes to be recovered.
As I understand it we can form an LLC and then declare to be a sole proprietorship and file a form C rather than be an S with more complex taxes. Is my assumption correct that marrieds filing together are a single entity and not a partnership?
Seeking out a professional to help with this incorporation, is a CPA good enough, or should we seek an EA or a tax attorney? Will I need to continue to have a CPA? I have filed my own taxes for many years using Turbotax after finding that we were paying our CPA/EA top dollar for one of his flunkies to simply do data entry in an equivalent software, and not getting the expertise we thought we were paying for. They made mistakes caught by the IRS, something that has not happened in 15 years of Turbotax. What i'd really like is to continue to prepare my own taxes and to consult with an EA occasionally, but I don't know if that's realistic.
My wife and I are looking to put our RE holdings on an "active" business footing, form an LCC (or one per held property?) and file taxes as a business rather than filing a form E. We have several reasons for doing this, from protecting our assets to establishing me as a RE professional as a way to exclude our RE business from financial aid assets. I do spend 750 hrs a year in RE and have no W2 income, though my wife does. But even so, we don't currently have passive losses so presumably the IRS will not take undue interest in us if there's no avoided taxes to be recovered.
As I understand it we can form an LLC and then declare to be a sole proprietorship and file a form C rather than be an S with more complex taxes. Is my assumption correct that marrieds filing together are a single entity and not a partnership?
Seeking out a professional to help with this incorporation, is a CPA good enough, or should we seek an EA or a tax attorney? Will I need to continue to have a CPA? I have filed my own taxes for many years using Turbotax after finding that we were paying our CPA/EA top dollar for one of his flunkies to simply do data entry in an equivalent software, and not getting the expertise we thought we were paying for. They made mistakes caught by the IRS, something that has not happened in 15 years of Turbotax. What i'd really like is to continue to prepare my own taxes and to consult with an EA occasionally, but I don't know if that's realistic.
I'm sorry to hear you were not using that great of an accountant. I also don't know what software they were using, but I will tell you I strongly doubt it is below TurboTax.
What do you think the savings would be?
What is your other job and how many hours do you spend in it?
Not having losses makes the RE professional designation irrelevant.
A single member LLC defaults to a sole proprietorship (Filing Schedule C or Schedule E) Schedule C is filed if it is active income which rental real estate is never classified. Schedule E is used for royalties and rental income.
For any type of rental income to be treated as a schedule C, you must provide services such as housekeeping/meals.
As I understand it we can form an LLC and then declare to be a sole proprietorship and file a form C rather than be an S with more complex taxes. Is my assumption correct that marrieds filing together are a single entity and not a partnership?
A two member LLC defaults to a partnership (Filing Form 1065 required) UNLESS the two reside in a community property state.
Seeking out a professional to help with this incorporation, is a CPA good enough, or should we seek an EA or a tax attorney?
I would strongly recommend an EA. EAs are the only ones required to take continuing education in taxation.
Will I need to continue to have a CPA?
CPA simply means accountant.
I have filed my own taxes for many years using Turbotax after finding that we were paying our CPA/EA top dollar for one of his flunkies to simply do data entry in an equivalent software, and not getting the expertise we thought we were paying for. They made mistakes caught by the IRS, something that has not happened in 15 years of Turbotax. What i'd really like is to continue to prepare my own taxes and to consult with an EA occasionally, but I don't know if that's realistic.
That is very possible. I can tell you that I do quite a bit of consulting work and review tax returns regularly. So there is a definite possibility to find someone you are comfortable working with.
Accountant · Philadelphia, PA · Member since 2013 · 303 posts · 210 votes
12y
You have a lot of ways you could go with this. I would sit down with a lawyer before setting up a structure for all of your real estate properties and have a plan for who should own what where. I would also think about why you want to report on a Sch.C rather than a Sch. E, I don't see any immediate advantages unless you're piling up some big passive losses you want to tap.
The ownership of the LLC is where I see your problem. Typically an LLC is considered a pass-through entity when it is owned by one person. Since you talk about "we" in the ownership of the LLC, that would be two people and a partnership. There is a law that allows spouses to elect to be taxed as a joint venture if the business is not operated through an incorporated entity like an LLC. But then half of the properties' activity would be on your Sch. C real estate investor business and half would be on her Sch. E? Sounds like a mess.
Also if you plan to go the RE professional route, be sure to document your time. The IRS will not take your word for it.
Rental Property Investor · Jersey City, NJ · Member since 2011 · 1k+ posts · 876 votes
12y
Thanks Tim,
Something I read after I posted said that for LLC purposes a married couple filing together is NOT a single entity, so for us both to be in it it needs to be a partnership. So you think we should go to a lawyer not an EA or CPA?
Like I said, we have no passive losses, but there's big rewards in financial aid in showing this to be an active business rather than passive investment. Our real estate is my primary business activity, I have another consulting type business that is very variable in it's income. Since I am the manager, super and renovator of 13 100 year old apartments, I do spend 750 hrs on it. But as you're an accountant (CPA?) let me ask again as constant audits would be a drag: if I'm not taking passive losses, why would the IRS even be interested in challenging my RE-Pro status? As far as I know there's no other tax benefits, they would get no more tax if they pierced it, so wouldn't it be a waste of taxpayer money to even try?
I'm still struggling to understand the implications of C vs E filing to get the outcome I'm looking for. Unfortunately some of it is simply in the perceptions and biases of a college financial aid officer who is not an accountant. It would certainly be easier to file form E, but a C would have more weight with them.
My wife and I are looking to put our RE holdings on an "active" business footing, form an LCC (or one per held property?) and file taxes as a business rather than filing a form E. We have several reasons for doing this, from protecting our assets to establishing me as a RE professional as a way to exclude our RE business from financial aid assets. I do spend 750 hrs a year in RE and have no W2 income, though my wife does. But even so, we don't currently have passive losses so presumably the IRS will not take undue interest in us if there's no avoided taxes to be recovered.
As I understand it we can form an LLC and then declare to be a sole proprietorship and file a form C rather than be an S with more complex taxes. Is my assumption correct that marrieds filing together are a single entity and not a partnership?
Seeking out a professional to help with this incorporation, is a CPA good enough, or should we seek an EA or a tax attorney? Will I need to continue to have a CPA? I have filed my own taxes for many years using Turbotax after finding that we were paying our CPA/EA top dollar for one of his flunkies to simply do data entry in an equivalent software, and not getting the expertise we thought we were paying for. They made mistakes caught by the IRS, something that has not happened in 15 years of Turbotax. What i'd really like is to continue to prepare my own taxes and to consult with an EA occasionally, but I don't know if that's realistic.
I'm sorry to hear you were not using that great of an accountant. I also don't know what software they were using, but I will tell you I strongly doubt it is below TurboTax.
What do you think the savings would be?
What is your other job and how many hours do you spend in it?
Not having losses makes the RE professional designation irrelevant.
A single member LLC defaults to a sole proprietorship (Filing Schedule C or Schedule E) Schedule C is filed if it is active income which rental real estate is never classified. Schedule E is used for royalties and rental income.
For any type of rental income to be treated as a schedule C, you must provide services such as housekeeping/meals.
As I understand it we can form an LLC and then declare to be a sole proprietorship and file a form C rather than be an S with more complex taxes. Is my assumption correct that marrieds filing together are a single entity and not a partnership?
A two member LLC defaults to a partnership (Filing Form 1065 required) UNLESS the two reside in a community property state.
Seeking out a professional to help with this incorporation, is a CPA good enough, or should we seek an EA or a tax attorney?
I would strongly recommend an EA. EAs are the only ones required to take continuing education in taxation.
Will I need to continue to have a CPA?
CPA simply means accountant.
I have filed my own taxes for many years using Turbotax after finding that we were paying our CPA/EA top dollar for one of his flunkies to simply do data entry in an equivalent software, and not getting the expertise we thought we were paying for. They made mistakes caught by the IRS, something that has not happened in 15 years of Turbotax. What i'd really like is to continue to prepare my own taxes and to consult with an EA occasionally, but I don't know if that's realistic.
That is very possible. I can tell you that I do quite a bit of consulting work and review tax returns regularly. So there is a definite possibility to find someone you are comfortable working with.
What is your other job and how many hours do you spend in it?
Not having losses makes the RE professional designation irrelevant.
Thanks for all the info Steve. Like I said, it's not a "job" but a sole consulting business in which I spend less time than the RE. The RE-Pro designation becomes critical for making the rentals an active rather than passive business, taking it off the table as assets for financial aid. This IS my business, no different than if I had a farm.
My understanding from some sources was that if you are a LLC or S corp filing form C the passive/active criteria like room services no longer applies. Do you know this not to be true?
Thanks Tim,
Something I read after I posted said that for LLC purposes a married couple filing together is NOT a single entity, so for us both to be in it it needs to be a partnership. So you think we should go to a lawyer not an EA or CPA?
Like I said, we have no passive losses, but there's big rewards in financial aid in showing this to be an active business rather than passive investment. Our real estate is my primary business activity, I have another consulting type business that is very variable in it's income. Since I am the manager, super and renovator of 13 100 year old apartments, I do spend 750 hrs on it. But as you're an accountant (CPA?) let me ask again as constant audits would be a drag: if I'm not taking passive losses, why would the IRS even be interested in challenging my RE-Pro status? As far as I know there's no other tax benefits, they would get no more tax if they pierced it, so wouldn't it be a waste of taxpayer money to even try?
I'm still struggling to understand the implications of C vs E filing to get the outcome I'm looking for. Unfortunately some of it is simply in the perceptions and biases of a college financial aid officer who is not an accountant. It would certainly be easier to file form E, but a C would have more weight with them.
I don't think audits will be an issue as long as you are keeping of your time and your expenses. I strongly recommend QuickBooks and utilize the Class system to keep track of individual properties.
Filing Schedule C will make your income subject to Social Security and Medicare. If you are above 113k in taxable salary you will only pay 2.9% in Medicare tax. As stated before you would not be allowed to d.o this.
If you have the properties are in an LLC that would help you for financial aid perspectives as it would be invested in a small business.
It is not worth the cost to change where they are supposed to be.
What is your other job and how many hours do you spend in it?
Not having losses makes the RE professional designation irrelevant.
Thanks for all the info Steve. Like I said, it's not a "job" but a sole consulting business in which I spend less time than the RE. The RE-Pro designation becomes critical for making the rentals an active rather than passive business, taking it off the table as assets for financial aid. This IS my business, no different than if I had a farm.
My understanding from some sources was that if you are a LLC or S corp filing form C the passive/active criteria like room services no longer applies. Do you know this not to be true?
You NEVER want to own real estate in a corporation. Even an S-corp. I would simply state the LLC moves it into a business and argue that.
Either way the consulting business makes it difficult to argue. You will need detailed records to argue.
How much have you dealt with financial aid? I can tell you most likely you can simply leave it out as you do not need to include on the FAFSA what is in a small business. That LLC is a small business.
You NEVER want to own real estate in a corporation. Even an S-corp. I would simply state the LLC moves it into a business and argue that.
Either way the consulting business makes it difficult to argue. You will need detailed records to argue.
How much have you dealt with financial aid? I can tell you most likely you can simply leave it out as you do not need to include on the FAFSA what is in a small business. That LLC is a small business.
It still does apply.
Thanks Steve, though I'm struggling to keep up with you. The consulting business makes it difficult to argue what? That I'm a RE-Pro? The business is a flat bid, deliver the goods type. No billable hours. And we're not talking big bucks, I rarely break $50k, last year was a loss.
I do understand the need to doc the hours for a potential audit, but I still don't understand why the IRS would be interested at all in piercing a RE-Pro with no passive losses. The taxes from filing Form C sound not much different than what we're currently doing with a C and E. We pay SS on the income from both. I don't see a line on the 1040 for Medicare tax, I guess that will be new.
Re: FAFSA, are you saying the RE-Pro status is irrelevant if our holdings are in an LLC? I thought it was a requirement for RE to not be passive, LLC or not It seems too easy just to form an LLC to take it off the asset table, or everyone with a RE portfolio would, no?
You NEVER want to own real estate in a corporation. Even an S-corp. I would simply state the LLC moves it into a business and argue that.
Either way the consulting business makes it difficult to argue. You will need detailed records to argue.
How much have you dealt with financial aid? I can tell you most likely you can simply leave it out as you do not need to include on the FAFSA what is in a small business. That LLC is a small business.
It still does apply.
Thanks Steve, though I'm struggling to keep up with you. The consulting business makes it difficult to argue what? That I'm a RE-Pro? The business is a flat bid, deliver the goods type. No billable hours. And we're not talking big bucks, I rarely break $50k, last year was a loss.
I do understand the need to doc the hours for a potential audit, but I still don't understand why the IRS would be interested at all in piercing a RE-Pro with no passive losses. The taxes from filing Form C sound not much different than what we're currently doing with a C and E. We pay SS on the income from both. I don't see a line on the 1040 for Medicare tax, I guess that will be new.
Re: FAFSA, are you saying the RE-Pro status is irrelevant if our holdings are in an LLC? I thought it was a requirement for RE to not be passive, LLC or not It seems too easy just to form an LLC to take it off the asset table, or everyone with a RE portfolio would, no?
It makes it harder to argue RE Professional if you don't have a schedule.
Are you referring to a C-corporation or Schedule C? A Schedule C is for a sole proprietorship. Form 1120 is for a C-corporation. Form 1065 is for a partnership.
You should not be paying Social Security and medicare on your Rental real estate income. It is Self Employment Tax(Social Security and Medicare).
Your rental income carries from Schedule E to Line 17 of Form 1040.
Income from your sole proprietorship carries from Schedule C to Line 12 of Form 1040 and Schedule SE.
I'm saying the RE Pro status is irrelevant to Financial aid. None of them will understand what you're saying. If you even have to show them your tax return. About 1/3 of student's fafsa aid asks for a 1040. They simply want to verify income. I've never come across an audit of net worth for financial aid purposes.
It makes it harder to argue RE Professional if you don't have a schedule.
Are you referring to a C-corporation or Schedule C? A Schedule C is for a sole proprietorship. Form 1120 is for a C-corporation. Form 1065 is for a partnership.
You should not be paying Social Security and medicare on your Rental real estate income. It is Self Employment Tax(Social Security and Medicare).
Your rental income carries from Schedule E to Line 17 of Form 1040.
Income from your sole proprietorship carries from Schedule C to Line 12 of Form 1040 and Schedule SE.
I'm saying the RE Pro status is irrelevant to Financial aid. None of them will understand what you're saying. If you even have to show them your tax return. About 1/3 of student's fafsa aid asks for a 1040. They simply want to verify income. I've never come across an audit of net worth for financial aid purposes.
-Steven
Thanks once more Steven. (I wish I could figure out the formatting of this site to insert my responses into your post)
I don't understand your reference to schedule, are you saying that splitting my time at all makes defending RE-pro harder? And I still don't understand why the IRS would be interested at all in piercing a RE-Pro with no passive losses. What supervisor would approve man-hours for no recoverable tax?
Sorry if I was confusing about tax, having paid self-employment tax my whole adult life, I think of it as SS, and I'm so resigned to taxes that I didn't even realise we weren't paying any SS on our RE cashflow. I'm meticulous about expenses and deductions, but then we pay what we gotta pay.
As for FAFSA, I desperately want to believe you! But I need to corroborate it. My eldest is still only a HS freshman, but as I understand it I need the next 2 fiscal years to show the right profile. My wife thinks we should contact an independent Financial Aid consultant to see if they agree with you. But what you say makes sense, they're not CPAs. But sometimes too little knowledge makes people dangerous, they often rigidly act on rote or hearsay rather than facts.
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
12y
Thanks once more Steven. (I wish I could figure out the formatting of this site to insert my responses into your post)
I don't understand your reference to schedule, are you saying that splitting my time at all makes defending RE-pro harder? And I still don't understand why the IRS would be interested at all in piercing a RE-Pro with no passive losses. What supervisor would approve man-hours for no recoverable tax?
Sorry if I was confusing about tax, having paid self-employment tax my whole adult life, I think of it as SS, and I'm so resigned to taxes that I didn't even realise we weren't paying any SS on our RE cashflow. I'm meticulous about expenses and deductions, but then we pay what we gotta pay.
As for FAFSA, I desperately want to believe you! But I need to corroborate it. My eldest is still only a HS freshman, but as I understand it I need the next 2 fiscal years to show the right profile. My wife thinks we should contact an independent Financial Aid consultant to see if they agree with you. But what you say makes sense, they're not CPAs. But sometimes too little knowledge makes people dangerous, they often rigidly act on rote or hearsay rather than facts.
Are you saying that splitting my time at all makes defending RE-pro harder?
Yes, that is what I'm saying.
And I still don't understand why the IRS would be interested at all in piercing a RE-Pro with no passive losses. What supervisor would approve man-hours for no recoverable tax?
You'd be surprised. I've had an auditor argue for 2 hours over $48 in tolls at the 25% bracket. That equates to $12.50 in tax.
It would be added on and it could be used to open up another year's return in which you did have losses.
Sorry if I was confusing about tax, having paid self-employment tax my whole adult life, I think of it as SS, and I'm so resigned to taxes that I didn't even realise we weren't paying any SS on our RE cashflow. I'm meticulous about expenses and deductions, but then we pay what we gotta pay.
As for FAFSA, I desperately want to believe you! But I need to corroborate it. My eldest is still only a HS freshman, but as I understand it I need the next 2 fiscal years to show the right profile. My wife thinks we should contact an independent Financial Aid consultant to see if they agree with you. But what you say makes sense, they're not CPAs. But sometimes too little knowledge makes people dangerous, they often rigidly act on rote or hearsay rather than facts.
The most important is your return from his Senior year of high school and those after that point.
The problem is they all have too little knowledge. What I will say is that I'd talk to one and I doubt they would know the difference.
On rereading, it's still not clear to a civilian that incorporating trumps the need to be active rather than passive, in addition to the clear statement that it obviates the need to provide services.
I'm still trying to find a local professional, there's an EA nearby, he's not a CPA too and he's pretty young. I guess I'm just not the trusting sort, I've had lots of bad lawyers for deals and my last EA was uneven in performance.
On rereading, it's still not clear to a civilian that incorporating trumps the need to be active rather than passive, in addition to the clear statement that it obviates the need to provide services.
I'm still trying to find a local professional, there's an EA nearby, he's not a CPA too and he's pretty young. I guess I'm just not the trusting sort, I've had lots of bad lawyers for deals and my last EA was uneven in performance.
Contribution to an LLC in both names would require the filing of a partnership return. If you then qualify as an RE professional, the real estate being your primary business, you could exclude the income.
As they state below the LLC would relieve some of the questions. What I would do is depending upon how many properties you have and the cost of LLCs in Jersey. I would have subsidiaries that hold each property.
This being a family business would be excluded provided most of your effort is spent doing that.
If the business is incorporated (e.g., C corporation, S corporation, LLC), the "significant services" requirement does not generally apply. Incorporating the business avoids many questions about whether it really is a business or not. However, the rental property must be owned by the business in order to be excluded, as the small business exclusion only applies to the business and its assets. The small business exclusion does not apply to assets that are managed by the business but not otherwise owned by the business. If the deed to the property is in the family's name, it is a personal asset and must be reported as an investment asset on the FAFSA. If the deed is in the name of the business, then it can be excluded on the FAFSA if the small business exclusion applies. For example, if the family owns a property which it rents to the business, that property is reported as an investment asset on the FAFSA because it is owned by the family, not the business.