Can you deduct expenses without an LLC?

Question

Alright "tax" friends... I need some clarity. I just heard someone say on a podcast, that they hold all of their properties in an LLC, because otherwise, they can't claim the deductions such as Property Management, mileage, repairs, etc.

(Background.... We are planning on purchasing a few rentals this year, hopefully our first one in the next month or so. We went through our pre-approval process, etc. We decided after reading so much on BP regarding LLC's vs larger umbrella insurance policies... to just start out the umbrella insurance route for sake of simplicity, and then re-evaluate as we go. (I don't intend to start a debate with the above... I just wanted to give the background of where we are at... I know there are a billion threads I can read and have read some, I will be revisiting those. :o)

However, when I heard the above, I sort of did a double take. We have spoken with quite a few individuals who have around 10 rental properties, and are using umbrella policies, vs the LLC. But that would seem to make NO sense if you cannot deduct what I would believe to be a substantial amount of deductions that are possible through real estate... which is one of the reason we all love real estate so much, right?

If you aren't claiming deductions through an LLC, can you still claim the same deductions on your tax return, if those income rental checks are made directly to you?

Okay... can someone help.... that would make no sense to me to leave all that money an the table. Help!

Couldn't find threads that address this... maybe I'm searching for the wrong thing... ?
Thanks all!

Greg Scott · Answer

Yes you can deduct any legal business expenses, whether they are made within an LLC or as a sole proprietorship.  Be sure to document it either way.

Regardless, I'd recommend getting a CPA on your team to help with your taxes.  A good one will EARN you more than they cost.

Justin Fox · Answer

You don't really have to set up anything to be a sole proprietor.  You could get a DBA in your state I guess.  But you'd still be considered a sole proprietor for tax purposes.  Just have a separate account for all your income and separate savings accounts for the security deposits and you'll be good to go.

Gino Barbaro · Answer

@Cailyn Aune

Hi Cailyn

I would ask your attorney about utilizing an entity such as an LLC to protect you.  My partners are discussing using an obligated member LLC, which does not shield you personally.  We would secure a huge umbrella.  But after Erin Andrews just received 55 million dollars in her suit, it makes you think twice.

I know they are more expensive to set up and file returns yearly, but look at the alternative

Good Luck with the first deal ( of many)

Gino

Steven Hamilton II · Answer

For the most part there is nothing that suddenly becomes deductible when you open an LLC except the Fees to become and operate as an LLC.

For certain business entities, some deductions might be slightly higher such as matching 401k contributions.

Greg Scott · Answer

@Justin Fox, I do the same.  I have $1M on each property and a $2M umbrella.  I do not personally know any Single Family owner that has been sued, but heard an insurance exec talking on a podcast who said in 30 years he saw a handful of liability cases each year exceeding $100K and the biggest ever was $1M.   That doesn't mean it can't happen to us, but the odds are low.

@Marcus Kennedy, I agree with Justin.  One KEY benefit of Real Estate Professional status is it allows you to take passive losses (e.g. excess depreciation on a rental) against active income (e.g. your spouse's W2 income).  Regular business expenses can always be applied against regular business income.

Greg Scott · Answer

I don't know your specific situation so probably best to talk with your professionals.

Early on I put my rent properties in LLCs.  Later I joined a large Real Estate group where most experienced members didn't, so I stopped.  Then when I wanted to refinance some of the early ones I had to pull them out of the LLCs for refinancing and never put them back.   For liability protection I am really relying on 1) good management practices 2) good property insurance, and 3) good umbrella policy insurance.

For accounting, I created an "agreement" between myself and our LLC (it was a difficult negotiation LOL).  The LLC "manages" all our properties for us.   All my cash runs through my LLC bank accounts and the finances run through the LLC books.  Mostly it just keeps everything clean for tax time.

In contrast, we have done some shared deals with family members.   All of those we put into LLCs, but it was as much for the contractual arrangement between members embedded in the LLC operating agreement, with liability protection as an added benefit.

Cailyn Aune · Answer

@Steven Hamilton II - Thank you Steven! That makes sense!

Steven Hamilton II · Answer

As a general rule you will be treated under the same rules and yes, everything would be reported on schedule E.  You could actually shoot yourself in the foot if you paid yourself management fees as that would be included in income, push you higher to phase outs, and then you would pay SE tax on that income.  So keep it on Schedule E where it goes unless you plan to manage for others.

Even a single member LLC is reported on Schedule E for rentals.

Cailyn Aune · Answer

Hey all…. Thank you for the responses! I have been out of town on business and juggling a handful of things… sitting down to pick up the pieces…. ! Okay, so the general consensus (and thank you!)... all the same deductions are possible through a sole prop.... so am I correct to assume that everyone who is holding their properties under their own names, with umbrella insurance, is operating under a sole prop?

@Greg Scott -  It’s always good to hear how people are managing their properties from the legal side. We are leaning towards doing the same thing…. This makes sense about running your properties through the LLC as the PM…. yes, good! (Okay... why doesn't it tag some people's names, even if you select it?)

@Steven Hamilton I - Thank you Steve. Of course this makes sense. Would the general advice be to have a sole prop if you don’t choose to own your properties in an LLC? Do you have to have a sole prop to deduct expenses? @Gino Barbaro - Thank you Gino. I have a feeling this is something I will always be reconsidering… and analyzing from multiple views…. Yes, Erin Andrews… oh jeez. @J Beard - good to note all of the above! Thanks! I appreciate it...!@Jacob Pereira - Thank you Jacob! Yes, that totally makes sense. Thank you for taking the time to respond..!

Jacob Pereira · Answer

When I listened to that podcast my ears perked up a bit too. I think that she actually just meant that you should try to get the maximum amount of discounts possible via your business. Her actual wording was a bit off, and some of her suggestions as well (I seem to recall Brandon reminding her that people were listening when she mentioned she deducted dates with her husband), but the overall advice was sound.

I also am not a tax professional, but I operate my business as a sole proprietor (with an umbrella policy, of course) and I still take deductions. My CPA has never had a problem with them.

Can you deduct expenses without an LLC?

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