Logistics and Structure of Multiple Non-serial LLCs for Rentals

[Jeremy B.]

I know that the topic of LLCs for rental properties has been discussed ad nauseam on this forum, and I appreciate the depth of knowledge that is available through the website. I have some very specific questions that I hope I can get some answers to here. I will be consulting with a CPA/financial advisor but I want to have a good understanding of it myself.

As my spouse and I start the process of investing in rental properties, we have decided to hold the properties in separate LLCs as we go. One of us has high W2 income in a lawsuit-prone job, and we will also invest in a good umbrella policy.

My plan is to have one management/administrative LLC to start off. This will have its own EIN, bank account, and business credit card, and will be opened soon. All initial scouting, research, expenses, etc will come out of this account. Eventually, it will be used to purchase landscaping equipment, business computers, trade subscriptions, etc. I'm in a state that doesn't recognize serial LLCs.

When a property is purchased, it will be put into its own LLC with its own EIN and bank account. Certain expenses and income will be unique to that property and will be transacted in its own bank account.

My specific questions relate to how to properly split up expenses through the "main" LLC?

1) For instance, if I bought lumber for repairs through the main LLC, I could cut a check from a specific property LLC for this amount. This seems more straight forward to me.

2) How do I divvy out other expenses, such as computer, lawn equipment, home office expenses, etc?

3) How does the income get split up? Do I leave it all in the individual property LLCs?

4) Should the main LLC charge a mangement fee to the other properties, besides dollar for dollar reimbursements? Will this convert passive income to active income?

5) Does the IRS rule about only claiming a loss 2/5 years apply to each individual LLC or my tax returns as a whole? We may be coming up on that rule as we have filed other non-real estate self-employed businesses in the past that showed a loss. Will it reset with a new business?

6) How do I take profit out of a pass through LLC set up like this? Do I just write a check to my personal checking account when necessary?

Thank you in advance!

[Stewart Miller]

I'm not a lawyer or CPA, but I'll take a shot:

Why is the management llc buying lawn equipment? Is it to mow the lawns of the rental properties? If so, the mgmt. LLC should have an management services agreement between it and all of the rental LLCs. In addition, I would have the manangement LLC own the rental LLCs.

#1- if the lumber you're buying is to make repairs to one of the properties, why not buy the lumber straight out of that LLCs account?

#2- those expenses shouldn't be divvied up. They should be written off as expenses of the mgmt. company.

#3- income(rent) would come in to the individual LLCs accounts. Each LLC would have expenses to pay (taxes, mgmt. fee, etc.). I was taught to not leave too much money in the rental LLCs. If a lawsuit hits, you don't want a lot of money in the account.

#4- yes, read #3. The income coming into the rental properties will not convert to active income. The main/parent LLCs income will be considered active.

#5- I have no idea.

#6- if I were you, I'd take a salary from the mgmt/parent LLC. Your salary could be the mgmt. fee or the rental LLCs could make distributions to its owner (mgmt/parent LLC) and you could withdraw that as a salary (which is what I do fairly regularly).