I don’t want to take any profit.

[Ducote Kiernan]

I have a few rentals and I owe what I consider a great deal of money on them. I have a good job and don't need the money honestly and the property's pay for them selves. I make a few hundred a month off then and I just want to keep all the money in the LLC and pay all the properties off before I reinvest it or use it in any way. So my question is if I use all the extra funds to pay off the properties and not pay my self will the irs take away my LLC? And are their any other downsides to doing this?

[Bob Norton]

@Ducote Kiernan @Joseph H. The IRS will not take your LLC away. It doesn't have that authority. An LLC is a legal entity in the State in which you create it. The State can revoke your LLC if you do not keep it in good standing by following the rules setup with the State, which is generally filing an annual report with the Sec of State and may include filing other documents.

As for taxes, if you are the sole member of the LLC, then the net income or loss from the property will be reported on your personal tax return on Schedule E. If you have a partner in the LLC, then you will be required to file a partnership tax return and your portion of the net income will be reported to the IRS and to you on a Schedule K-1 and you will report this income or loss on your Schedule E (page 2). You cannot chose whether or not to be taxed on your rental income. However, if you have a mortgage, then most likely in the early years you will show a rental loss due to the deduction of mortgage interest and depreciation. Whether or not you will be able to deduct your rental loss typically depends upon your adjusted gross income.

As for showing a loss for 5 years, the IRS still cannot revoke your LLC. If they can prove that the activity of your LLC is actually a hobby, then they will make you pay taxes on the gross income instead of the net income (since they will treat your expenses as unreimbursed business expenses which you can no longer deduct under the new law). However, the hobby rules do not apply to rental real estate, since it is considered an investment under the tax law. Additionally, the hobby rules are more complicated than this and if the taxpayer can show that they have a plan to make a profit and have taken actions to achieve this plan, then the IRS may have a hard time proving that the activity is only a hobby. I would argue that setting up an LLC is one part of the business plan with an intention to generate a profit.