Setting up a company to shield REI income

[David Lutz]

Afternoon all :)    Appreciate everyone's help in advance.  Would like some advice on how to minimize my tax liability by setting up a company.

I own a primary home in CA, and out of state SFRs. Everything is under my name. I decided to carry an umbrella instead of leveraging an LLC (they can be pierced anyway so don't negate the need for an umbrella, they increase operating costs, and I was able to get lower interest rates in my own name). Regardless, I'm not a RE professional in the eyes of the IRS (despite the crazy amount of time I spend on it) and so my out of state REI depreciation doesn't do anything to protect my CA W2 income.

I would like to set up a company to manage the property management companies I use, the one property I manage directly, and provide me incredibly insightful advice..... and shield my W2 income. Is that the best approach for creating a tax shield? Do I need to run my rents through the company? Should I set up a Sol Proprietorship vs an LLC for this? What else am I missing?

Thanks!

David

[Michael Plaks]

Quote from @David Lutz:

@David M. So currently every year I accrue "losses" on the rentals, which carry forward to protect future earnings (whenever the rents get large enough that they aren't defrayed by operating costs and depreciation), but that is only protecting future REI income and it's being devalued every year by inflation. I'd be in a much better place if I could apply an paper REI losses against my earnings from my day job. That would lower my current tax bracket and benefit me now. I would also like to claim a home office and business expenses. All of that requires setting up a small business. Looking for advice on the right way to set that up.

I'm not as diplomatic as David M.   There is no "right way to set that up," although yes, you definitely "would be in a much better place." You'd be in an even better place if taxes did not exist at all. You and me both. Maybe even David M.

The tax law is intentionally constructed to prevent what you want and what used to be available many years ago and was then called "tax shelters," rental properties being at the top of the list. 

And no crafty business setup can overcome these restrictions. Not legally, that is.

Under current law, here're your options to offset W2 income with rentals, in a nutshell:
- quit your job and become a full-time investor
- marry someone who already is
- transition into short-term rentals and buy a new one every year

You also have options that will let you "cash in" these locked up losses but not against your W2 income:
- invest in syndications or other investments that generate passive income
- sell one or more properties to generate passive gains

None of that should be done strictly for tax reasons. You must have business/investment reasons first, and consider tax benefits as an icing on the cake, not the cake.