LLC rental account or personal rental acct for general expenses

Tax, SDIRAs & Cost Segregation
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LLC rental account or personal rental acct for general expenses

Felix Stone
Rental Property Investor · Member since 2020 · 36 posts · 18 votes

Hi All - Unfortunately I have lost trust in my CPA after reviewing my latest tax returns(they missed major expenses that I had to call out) so resorting to this community for learning and knowledge while I also look for a new CPA

I bought a property in my own name in February and then bought another one in LLC 1 in May and then a 3rd one in June in LLC 2. Both LLC 1 and LLC 2 are disregarded entities owned by my holding LLC. I have separate bank accounts for personal property, LLC1, LLC 2 and Holding LLC.

My question is around non-property related expenses like traveling to scope out new markets, home office, supplies for the office, legal fees, professional services etc. 

Should I be using personal property bank account or the holding LLC bank account for these generic expenses for most tax benefit and least risk of audit? Or any other option (Not sure if some of these expenses are even allowed to be deducted)

I have a W2 job and I rent my apartment currently. I am also in the highest tax bracket atm. 


Thanks so much. I am always very grateful for all the people helping out. 

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  • Carl Miller
    Attorney · Littleton, CO · Member since 2015 · 28 posts · 13 votes
    5y

    Hi Felix,

    Sorry to hear about the difficulty with your CPA. Without doing a deep dive into the deductibility of the expenses you mentioned, I would say that the expenses which are not easily allocated to a specific property (I call them "peanut butter expenses" because they are spread around) should be run through the holding LLC. Then have the title holding LLCs pay the HoldCo entity a management fee. Keep a separate account for this entity. As for audit risk, it's very difficult to reduce audit risk while using disregarded entities. Simply because that's where the IRS has identified the most abuse of the tax code. The best defense against IRS audits is a good record-keeping system. You can use an entity structure to somewhat reduce the likelihood of an audit but even that can fail to prevent your file from being pulled.

    Generally speaking, your audit probability goes up as you make more money and file a Schedule C. If you're filing regularly and paying taxes, your audit chances go down. If you're taking weird deductions, your odds go up.

    I work to train my clients that the biggest risk in RE investing is not an IRS audit, it's bad investments that you don't immediately dump. You can't identify bad investments without good books. With good books you can win the RE investment game and avoid the stress of worrying about an audit at the same time.

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  • Felix Stone
    OP
    Rental Property Investor · Member since 2020 · 36 posts · 18 votes
    5y

    @Carl Miller. - That is a great and elaborate response. I am really focusing on this area the next couple of months so great to hear validation from you on this regard. Thank you so much #alwaysbelearning

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    5y

    @Felix Stone

    Traveling to scope out new markets is normally not a currently deductible expense.

    Can you elaborate why your accountant missed the expenses
    Did you list the expense and he didn't pick them up on the return?
    or
    Did he miss the expense because he did not ask you about those expenses?

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  • Felix Stone
    OP
    Rental Property Investor · Member since 2020 · 36 posts · 18 votes
    5y

    @Basit Siddiqi Both scenarios apply here. Expense listed but not picked and Expense not asked about. 

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