@Patrick L. "I'm not sure why you'd be itching to lose more than $25k/yr though."
Answer: Rental activity is classified by the IRS as a "passive activity" even if you materially participated in that activity, so passive losses are limited by passive gains, unless you escape the passive-loss classification by materially participated as a real estate professional. This is when you can take losses from rental activity to reduce other Active income like wages.
I am fortunate to have a full time high paying job outside of Real Estate BUT, currently pay at a high tax bracket.
A way to decrees my tax liability to ZERO or less than 0% is by recording the loss that flows thru Schedule K from my Real Estate Landlord Business.
It is easy to reach more than $25K loss (passive lost limit) when you account for closing cost, depreciation, mileage, office expense etc. of more than 4 rental properties. Being able to classify this loss as "active" instead of "passive" income, is essential.
@Patrick L."It has nothing to do to do with having an LLC or not, instead you must work more than half of your hours each year on the real estate business with a minimum of 750 hours devoted to real estate."
Answer: This is ONLY true for an individual but not true for a business entities.
For an individual "Sole Proprietor" to be classified as a "real estate professional" per IRS Publication 925 they must met both of the following requirements:
1. More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.
2. You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.
However, a closely held corporations (Like my S-Corp as an example) can be qualify as a Real estate professional if more than 50% of the gross receipts for its tax year came from real property trades or businesses in which it materially participated (note: Material Participation is defined in IRS Reg. Section 1.469-5T and must meet one of the seven tests Which I do).
As an individual with two full time jobs, it is statistical impossibilities to meet the two rules for individuals but I can easily meet the requirements under my Closely held Corporation. This (and establishing business credit, another subject) is the big WHY I do my Land lord business under a Corporation rather than under my own name.
@Jon Holdman "What deductions can you take with an entity that you can't otherwise?"
Answer: The main difference is in between IRS classification of "Investor" vs. "business owner". In summary, an investor makes his money in the form of "passive income" were a business produces "active income" (explained above). But to answer your question some additional deductions a business may do are:
Capital Expenses:
- Business start-up cost
- Business assets
- Improvements
Personal versus Business Expenses
Business Use of Your Home
Business Use of Your Car
Employees' Pay
Retirement Plans
Rent Expense - Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
Interest - Business interest expense is an amount charged for the use of money you borrowed for business activities.
Taxes - You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
Insurance - Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.
Read More at:
http://www.irs.gov/pub/irs-pdf/p925.pdf And
http://www.irs.gov/Businesses/Small-Businesses-&-S...
