Structuring LLC's to own and manage rentals

[Dilini Sundaram]

I have 10 long term rentals in an LLC, called SP. 50% owned by me, 50% owned by my mother. I manage all 10 rentals. We are buying a truck this year and I would like to do a Section 179 deduction as well as have a home office deduction.

My accountant is recommending I start up a new single member LLC as a management company. The holding company, SP LLC, would then pay my management company a fee every month and I would take deductions from that company. He says this will help alleviate complications since the ownership is split in the current LLC and possible gift tax issues since my mother is the one that brings the capital to the transactions.

Anyone in a similar situation? How do you structure your LLC's and corporations for the RE you own AND manage to ensure you are getting the best tax benefits?

[Jeff Nash]

@Dilini Sundaram

Based on the fact pattern you presented it sounds like it might be a good option.  You would be recharacterizing passive to active income with the use of a management company.  I don't know where you stand, but if you are in a higher tax bracket a C-Corp, which is currently taxed separately as a stand-alone entity at a lower historical statutory rate (21% versus 35% since 2018), might be advantageous. Basically, you can get a management fee deduction on the LLC side at a higher rate and pick up income at a lower rate with the management company.

I assume your CPA and/or a good attorney will do what's in your collective best interest and go through the pros/cons of entity selection.