How to avoid personal income tax on rented 2nd home

[Michael Creamer]

I have a house that I have a mortgage on and it is listed in my name and I'm looking to find out information about how I can achieve better tax benefits for things like avoiding income tax for collecting rent and how I can write off expenses for the house. Is there a way to do this while the house is still under my name like maybe forming an LLC and having the tenants pay rent to the LLC?

[Don Konipol]

Quote from @Michael Creamer:

I have a house that I have a mortgage on and it is listed in my name and I'm looking to find out information about how I can achieve better tax benefits for things like avoiding income tax for collecting rent and how I can write off expenses for the house. Is there a way to do this while the house is still under my name like maybe forming an LLC and having the tenants pay rent to the LLC?

All legitimate business expenses are deducted from gross revenues to arrive at net income.  You don’t need another entity for that, with a few exceptions having to do with retirement plans.  Tax rates have been adjusted, but may be somewhat unequal between corporations and sch c reporting individuals. 

Personal expenses do not become “write offs” because you’ve created a business entity.  This is a common misconception.  However, it appears some people are much more willing to claim personal expenses as business expenses if they have a business entity rather than a sch c sole proprietorship.  Like Leona Helmsley, who paid $965,000 to have her house remodeled and charged it off as a corporate expense.  Her conViction for tax fraud led her to spend some years in prison while in her 70s.  Not the way I’d want to spend my “golden years”.  

Here’s the bottom line; Business owners write off expenses because they HAVE business expenses.  Employees don’t write off business expenses because they DO NOT have business expenses.  Yes, many people (1) misclassify personal expenses as business expenses and or (2) do not report all their income on their tax returns.  This is much easier for a business owner, or active investor than a employee, obviously.  This is also a personal decision, covering numerous different question or morality, ethics, responsibility, risk, etc that should not be considered here.  

A CPA with a real estate specialization can best advice you on how to arrange your affairs to LEGALLY minimize the taxes you’ll pay.  Improved real property has a natural tax advantage aspect because of depreciation.  But because of recapture, capital gains tax differential as to ordinary income, ordinary income, earned income, investment income differences, retirement funding, 1031 exchange deferrals, 401k deferrals, etc. the world of tax minimization become VERY COMPLEX.  You’ll only find a lot of confusion and even accurate advice may not be good for your individual needs on a forum.  See a tax professional.