Paying yourself back the initial investment for LLC

Investor · Columbia, SC · Member since 2018 · 5 posts · 1 vote

Following. I have the exact same question

Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes

I let me tax man tax care of this, but I think what you are talking about it 'capital contribution' - the money you 'put in'. We do some of our own work on our units like remodeling labor, lawn mowing etc.... When we take income it is a mix of 'services provided' (labor) which is taxed, and 'withdrawl of capital contributions' (which is not taxed).

I think you are refering to the second kind of income. I assume that once all of our initial contribution is taken out that then it will all be taxable.

Dan Dietz

[email protected]608-524-4899

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Wayne Brooks

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes

8y

It’s not quite that simple. Realize that when you “pay yourself back” with “profits” the llc has made, it doesn’t work this way. Say you initially put $20k in.....

I short, no you can not take the first say $20k of generated profit, call it repayment, and avoid the tax on it.

Repayment of a loan(principle) or capital contribution is not an “expense” for the “entity”. You really don’t get your capital contribution back, tax free, until you sell or refi the asset.

Think of your llc like it being your wife, which you file jointly with. If your llc generates $20k taxable profit for the year, the repayment of the loan/capital contribution is not an expense so when you file a return for the llc, it/you still has a $20k profit to pay tax on.

A CPA can explain it better than I can.

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Adam Joe Wolf Jr.

OP

Member since 2018 · 2 posts · 2 votes

8y

Thank you for your replies. It was helpful.

1. Wayne. Are you saying that once I sell the property through an entity it is tax free? I did not know that. You said, "You really don’t get your capital contribution back, tax free, until you sell or refi the asset." That would be because the original investment is not taxed, just the $$$ added to the original amount, correct? (Capital gains).

2. Also, I would be selling it through the entity years down the road, not through my name even though it is my name that made the initial investment into the LLC. So I still would not be getting the initial investment back in the true sense of lending money to the LLC and getting it back tax free. The LLC would. The tax man sure gets more than his share! But it is good to know going in. It was a good point that any loan is not considered a tax deduction (I believe just the interest is).

I am just trying to get ideas so I can plan the first few years out.

So, in a nutshell, that initial cash purchase is lost until you resale. Then, upon selling, the entity gets it, not me. When you make a sell, can you just have the entity cut a check to you, as the CEO of the LLC? I guess it would be taxed too, again. Hopefully just the amount over the initial investment, even though it came from my personal account and was sold from the LLC.

I have so many other questions, but I just need to sit down with a CPA! I need to get some good books on LLC to understand how you pay yourself, how you get the money back yourself if you have the entity sell a home, etc.

It seems you can invest personal money into the LCC but you cannot get it back except through the LLC, from my limited base of knowledge on this so far.

1 Reply

Wayne Brooks

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes

8y

When you sell, the llc gives you Your initial $20k back.....it wasn’t “profit” to the llc, and not to you since it is return of your capital contribution. Remember, any profits or losses the llc has flow directly to your personal tpreturn, just as if the llc didn’t exist.

1 Reply

James Miller

Attorney · Fort Worth, TX · Member since 2015 · 372 posts · 176 votes

8y

Originally posted by @Adam Joe Wolf Jr.:

Hello,
I am getting ready to make the jump into Real Estate. In June, I will have X dollars to invest in buying a home. I plan to add a home or two every year for the next 10 years. From what I have read, it is best to set up a Series LLC, BEFORE buying my first property. (This is argued, and I am not sold on it yet, but let's go with that for the sake of this conversation).

My question comes from the following scenario. I (with a lawyer) will create the LLC. I will then lend my personal money ($X) to the LLC so the LLC can purchase Investment Property #1 in cash. That property will then be used as equity for the second property down the road. After the LLC starts making money back from the rent on Investment Property #1,, can I pay myself back as the lender to the LLC (however long that takes) and not be taxed on that portion of money that was used to buy the property? I think it would be untaxed until I get into profit, and I would not be making profit until the initial investment is paid off. Right? If I cannot do that, I would be getting triple taxation. (Taxed on my personal income that I am saving to start this, taxed on the purchase of the home, and taxed on paying myself back.)

I cannot find anything on the finer details about how to pay yourself back the money you lend to start the LLC. Paying back the initial investment... I see no difference paying myself back than if I borrowed from a bank to start it. I will have the cash, so I want to borrow from myself, and pay myself back with interest. It makes sense, but I do not know the legality, the process, etc.

I see that I am also supposed to pay a salary to myself. I would make that small the first few years so I can 1. pay back the initial investment 2. save up for repairs

Any advice, or recommendations to a good source would be appreciated.

Thank you,
Adam

I think you're confusing the concept of a loan, versus a capital contribution. If you just put money into your LLC, that's a capital contribution. You may, generally, then take "out" the capital contribution amount at any time and it doesn't affect income or expense. Pass-thru entities don't pay tax directly so you'll already be taxed on income and loss, regardless of whether you move money in or out.

It is possible to lend to an LLC where you're a member, but that's not usually done if you're the sole-member.

3 Reply

Dan V.

Real Estate Consultant · Norfolk, VA · Member since 2017 · 345 posts · 202 votes

8y

It depends on what type of entity setup you will have. If it's an LLC (pass thru structure), you can any time put in money as capital contribution and money out as capital distribution without affecting your taxes, you don't have to worry about salaries or interest to yourself. S-corp & c-corp have different tax treatment when it comes to money distributed to yourself which is more complicated. Talk to your tax accountant or tax strategist to determine what entity type best fits you, and discuss the pros & cons as well. But in my opinion, if you are just starting out, LLC should be fine, for simplicity.

2 Reply

Ashish AcharyaBusiness Member

CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes

8y

@Adam Joe Wolf Jr. and @David Paik ,

I have got the same question three times this week. It is not uncommon to have these concerns:

To put it simply:

1) You can either have cash in your bank account or you can use it buy a property. When you buy a property. the asset is changed from a cash to a house. Nothing has changed so far, just a reclassification of the asset you had( CASH -> HOUSE). If you never rented this house, Just as you would not get taxed when you withdraw your money from a bank, you dont get taxed when you sell( withdraw) the house.

2) The only tax on withdrawing the house in the gain. Cash dont grow, but the house does.

And remember all the money you earn or invest is taxed one. ( unless C-corp- out of scope for this post). There is no triple tax as you mentioned.

If the house is rented:

3) The investment in the house now will give you income (rent), you pay taxes each year on the net income. After you pay tax on your income, you can choose to keep it in the LLC or distribute it. There is no tax when you distribute it. Let me give you a simple example

1) Initial investment: 100,000 ( bought a house) - no tax

2) house earned income : 1000 - taxed ( lets say tax is 200 = 1000-200=800 cash in your LLC bank)

3) New investment balance = 100,000 (house) + 800 (Cash- after tax net income) ) - not tax

You can take out $100,800 from your LLC without any tax. Cash of 800 plus initial 100,000. The 800 is cash, so you can take it out anyday, but 100,000 is a house, so you cannot withdraw it just like cash. You have to sell it to withdraw it. if you sell and you dont have any gain, you dont pay tax. if you have gain you only pay tax on the appreciation.

So bottom line: You are taxed on:

1) Yearly income your initial investment creates

2) any gain when you sell the initial investment.

I understand It is very lengthy and confusing to explain how to income and distribution interacts and how it is taxed in a post. if you want, I can explain over the phone. Feel free to reach out to me anytime.

[email protected]941-914-7779

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Caren E.

Baldwin, MD · Member since 2016 · 7 posts · 0 votes

5y

The last few posts are helpful. I wonder if the money in an LLC account, from rent but established before the rental house was put into it, can be withdrawn without being designated as a distribution but rather a return of capital pre existing before the house being rented was in the LLC? We are now in a family partnership so not a pass through any more.

Thanks for any insights,

caren

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Paying yourself back the initial investment for LLC

Paying yourself back the initial investment for LLC

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