Arms length transaction question

[Rick Bassett]

I am setting up a LLC for property management. The LLC will manage my properties, which are single member LLC's as well as well as properties for other owners.

My plan is to have my property management LLC collect a reasonable and competitive management fee from all owners (including my LLC's) to manage their properties.

My accountant says that I can collect the fee from other owners but I am not allowed to collect fees from my own LLC's as that isn't an arms length transaction and it isn't allowed by the IRS.

It seems to me that any property owner could hire a property management company to manage their property and it shouldn't a matter if they hold an interest in that property management company as long as the services being received and pricing paid are comparable to what other clients (owners) of the property management company are receiving.

I really don't believe the advice my accountant is providing, which is why I am posting here for opinions.

[Account Closed]

I agree with Bill, there is no reason that you can't use multiple entities to separate various activities.

I have done something similar with a mixed use building I purchased. The property is owned by an LLC that collects rent from all of the tenants including my accounting firm. I like this structure for a number of reasons. One, my tenants don't need to know that I own the building. Two, I separate ordinary business activity from my passive activity. Three, I protect this asset from any liabilities that might arise from my accounting practice. Four, I can more accurately show the cash flows and operating activity for the investment property.

While it might be said this is not an arm's length transaction, it is not necessary that it be one. Each entity needs to claim the income or expense as though it was from any other vendor.