Maximizing Tax Benefits of an LLC

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Maximizing Tax Benefits of an LLC

Samantha Kay
Member since 2019 · 4 posts · 2 votes

Newbie here!

We have a secondary home we plan to start to use as a STR next summer. The home is currently in our name and we have a conventional mortgage on it.

-For those with a house in your name, do you have an LLC? If so how do you maximize the tax benefits of it? Do you 'rent' the house to your LLC?

-Has anyone found a benefit to transferring the title to an LLC while still having some sort of lending on it? If so, how did you do it? I'm under the impression you can't have a conventional mortgage in your personal names with a property titled to an LLC. What type of lending have you found to be best?

Thank you so much!!

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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
7y

Great news!

There are literally 0 tax benefits of an LLC.

Not a one. 

You get to deduct the annual LLC cost- but aside from that you get the same deductions you're entitled to if it's in your personal name.

It's really there for legal protection purposes, or structuring. But tax wise it doesn't generate any benefits. 

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  • Eric P.
    New York City, NY · Member since 2016 · 470 posts · 348 votes
    7y
    Originally posted by @Samantha Kay:

    Newbie here!

    We have a secondary home we plan to start to use as a STR next summer. The home is currently in our name and we have a conventional mortgage on it.

    -For those with a house in your name, do you have an LLC? If so how do you maximize the tax benefits of it? Do you ‘rent' the house to your LLC?

    -Has anyone found a benefit to transferring the title to an LLC while still having some sort of lending on it? If so, how did you do it? I'm under the impression you can't have a conventional mortgage in your personal names with a property titled to an LLC. What type of lending have you found to be best?

    Thank you so much!!

    Great question for a CPA who specifically specializes in REI!

    @Daniel Hyman

    0Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    7y

    Great news!

    There are literally 0 tax benefits of an LLC.

    Not a one. 

    You get to deduct the annual LLC cost- but aside from that you get the same deductions you're entitled to if it's in your personal name.

    It's really there for legal protection purposes, or structuring. But tax wise it doesn't generate any benefits. 

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
    WebsiteView Page
    8Reply
  • Luke CarlPro Member
    Rental Property Investor · Tennessee Florida · Member since 2016 · 4k+ posts · 5k+ votes
    7y

    @Natalie Kolodij YOU RULE! Need a new client with too many properties? 

    @Samantha Kay read a book called Loop Holes Of Real Estate 

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  • Samantha Kay
    OP
    Member since 2019 · 4 posts · 2 votes
    7y

    You guys are awesome, thank you so much!

    1Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Luke Carl:

    @Natalie Kolodij YOU RULE! Need a new client with too many properties? 

    @Samantha Kay read a book called Loop Holes Of Real Estate 

     No such thing as too many properties- feel free to reach out!

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
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    1Reply
  • J Douglas
    Member since 2019 · 1 post · 0 votes
    7y

    @Natalie Kolodij. What about states that allow series llc structures like Texas. Say you generate $150k per year flipping and renting, each property in its own series. Couldn’t you pay yourself a salary as a property manager...something like $45k a year, and then take the rest of the profit as a tax free distribution? My CPA said I could. I did actually do that last year. Just sayin.

    0Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @J Douglas:

    @Natalie Kolodij. What about states that allow series llc structures like Texas. Say you generate $150k per year flipping and renting, each property in its own series. Couldn’t you pay yourself a salary as a property manager...something like $45k a year, and then take the rest of the profit as a tax free distribution? My CPA said I could. I did actually do that last year. Just sayin.

    That would be an S corporation where you take a salary and only helps in any way with flip income. She's asking about a rental. 

    Rentals are already passive, so there is no self employment tax to be saved. 

    And actually, if you're charging yourself management fees against your rentals income you're turning that income into non-passive, which triggers more SE tax so that could be hurting you. 

    Just sayin. 

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    4Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    7y

    Natalie is exactly correct. 

    An S Corp would be malpractice to advise. I've recommend clients look into suing prior accountants and attorneys for that year advice.

    [email protected]224-381-2660
    3Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    7y
    Originally posted by @Natalie Kolodij:

    Great news!

    There are literally 0 tax benefits of an LLC.

    Not a one. 

    You get to deduct the annual LLC cost- but aside from that you get the same deductions you're entitled to if it's in your personal name.

    It's really there for legal protection purposes, or structuring. But tax wise it doesn't generate any benefits. 

    There are a handful of pros and cons of the LLC is taxed as a partnership; however, tax savings is not one.

    [email protected]224-381-2660
    1Reply
  • Daniel HymanBusiness Member
    CPA · Milwaukee, WI · Member since 2016 · 2k+ posts · 1k+ votes
    7y

    No real tax benefit to the LLC for buy and holds, as mentioned by the experienced tax pros above.

    An LLC taxed as an S-corp might be beneficial for more active businesses (flipping, wholesaling, real estate brokerage, etc). But it pays to run the numbers to see if that election makes sense. The wrong choice would end up costing more in admin fees than the tax savings.

    Thanks for the tag @Eric P. 

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    0Reply
  • Lucas TaylorPro Member
    Accountant · Belmont, CA · Member since 2017 · 12 posts · 11 votes
    7y

    I'll third the other tax pros... Forming an LLC will not benefit you come tax time. LLC is formed to protect your assets (LIMITED LIABILITY company). 

    Paying yourself as a property manager could cause you to pay self-employment taxes, which no one wants to do!

    0Reply
  • Dominick Austria
    Accountant · Las Vegas · Member since 2019 · 40 posts · 17 votes
    7y

    I wouldn't be worried about the LLC for the reasons mentioned above. If this is a secondary home and you are using it as a short term rental does this mean you are using the property personally through the year? Depending on the days you rent and you use the property personally it could have a negative effect on it. There's special allocations for the deductions that need to happen.

    0Reply
  • Kerry BairdPro Member
    Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
    7y

    We have an LLC for STR ownership. If something happens and we are sued, we want to limit losses to the short term rental side of operations, and not allow knock-on losses between our long term rental side.

    1Reply
  • Scott SmithPro Member
    Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
    7y

    @Samantha Kay, here is graphic to show what value LLC's are intended to accomplish. Even though there may not be a tax benefit, there are other expenses and issues they can save you money on. Here is an article I wrote where I make my case for why an LLC is worth the expense. 

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    1Reply
  • Samantha Kay
    OP
    Member since 2019 · 4 posts · 2 votes
    7y

    @Scott Smith The visual is helpful, and I thought it was a great article, thank you for linking that! If the property has to remain in our personal names, is there a way to utilize an LLC correctly?

    0Reply
  • Ken Latchers
    Hatfield, PA · Member since 2012 · 1k+ posts · 629 votes
    7y
    An LLC is something you set up  in the same state of the property, no matter what anyone else says, with the hope that it might provide you liability protection if you did everything absolutely correctly. And this probably won't apply if you were personally negligible. Especially if you were grossly negligible.

    true protection more depends on having proper short-term Insurance in place

    posted by @Samantha Kay:

    @Scott Smith The visual is helpful, and I thought it was a great article, thank you for linking that! If the property has to remain in our personal names, is there a way to utilize an LLC correctly?

    1Reply
  • Todd Goedeke
    Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes
    7y

    @Natalie Kolodij An advantage of self employment income is the ability to establish a Solo 401k. Then other 401ks and IRAs can be transferred into łhe Solo 401k as well as making contributions  .

    0Reply
  • Scott SmithPro Member
    Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
    7y

    @Ken Latchers, not sure why you believe only LLC's that are set up in the State of location can own property. Generally, out of State LLC's can own property in other States by registering as a foreign LLC in the State where the property is located. Am I missing something here? If so, sorry!

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    7y
    Originally posted by @J Douglas:

    @Natalie Kolodij. What about states that allow series llc structures like Texas. Say you generate $150k per year flipping and renting, each property in its own series. Couldn’t you pay yourself a salary as a property manager...something like $45k a year, and then take the rest of the profit as a tax free distribution? My CPA said I could. I did actually do that last year. Just sayin.

    Even in a sub S Corp, the $105k profit is still profit....it still flows to your personal return, and gets taxed whether you take it out or not, you don’t get to call it a tax free distribution.

    A tax free distribution are for funds which have Already been taxed, is my understanding.

    1Reply
  • Ken Latchers
    Hatfield, PA · Member since 2012 · 1k+ posts · 629 votes
    7y
    "Am I missing something here?"

    I didn't say they cannot own property. I said there's absolutely no benefit to this. People keep pretending to be smart and telling people 2 set up the corporation in some friendly state. But that will not help you either tax tax-wise or in court.

    and I have seen plenty of well written articles on the folly of thinking an out-of-state LLC will help you in any meaningful way.

    you're taxed in the state of the property. You are sued in the state of the property.

    Originally posted by @Scott Smith:

    @Ken Latchers, not sure why you believe only LLC's that are set up in the State of location can own property. Generally, out of State LLC's can own property in other States by registering as a foreign LLC in the State where the property is located. Am I missing something here? If so, sorry!

    0Reply
  • Tenae Wilson
    Rental Property Investor · Los Angeles, CA · Member since 2015 · 5 posts · 1 vote
    7y

    @Scott Smith do you have to establish an LLC in every state you buy property in?

    1Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Todd Goedeke:

    @Natalie Kolodij An advantage of self employment income is the ability to establish a Solo 401k. Then other 401ks and IRAs can be transferred into łhe Solo 401k as well as making contributions  .

    This is literally not at all what we're talking about. 

    We're talking about LLC benefits for a rental. Which does not generate self employment income.

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
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    1Reply
  • Scott SmithPro Member
    Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
    7y

    @Tenae Wilson, you do not need to establish an LLC in every state you buy property in. In those cases, the LLC is a "foreign" company and many states have requirements and some franchise fees for both resident and the foreign LLC. @Ken Latchers, I guess if you have an existing LLC in a different State, it would be an advantage to register the LLC than to create one in the State to do business there?

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    0Reply
  • Ken Latchers
    Hatfield, PA · Member since 2012 · 1k+ posts · 629 votes
    7y
    I would hope if you were an attorney, they would not need to guess obviously a "foreign" LLC can register in that state. That didn't really have much to do with what I was saying. I said that it makes no sense to open an LLC for vacation rental in state that is different than the property. This is not a Fortune 500 situation where you register in the most business-friendly state.

    Originally posted by @Scott Smith:

     @Ken Latchers, I guess if you have an existing LLC in a different State, it would be an advantage to register the LLC than to create one in the State to do business there?

    0Reply
  • Scott SmithPro Member
    Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
    7y

    @Ken Latchers, @Samantha Kay said she was a newbie and @Tenae Wilson was following your thread - I don't think either are attorneys and your advice seemed so certain. With due respect to your opinion, a case can be made for the strangest set-ups for and against LLC's in certain States and I do so. I always like to trace back legal advice to law ore facts to make sure I don't inadvertently mislead people, but that is because I am an attorney. You may be totally correct, I just was interested in any article to support your opinion. Here is my article if you want to check it out.

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