All Forum Posts by: Marc Villiaer

Hi Nicholas-

Thanks for your willingness to provide your insight on real estate investing and taxes.  I didn't see your post earlier so am re-posting a link to a series of questions I had posted earlier.  I would appreciate your take on the situation.

https://www.biggerpockets.com/forums/51/topics/690776-personal-use-of-investment-property-with-mmllc

Thanks in advance.

Marc

The idea behind structuring it as a MMLLC (in this case my wife is the other member but it could be anyone or a broad syndicate as well) is that property will be held as a real estate investment entity. This investment entity will generate its own K-1 with the various income and expense (including mortgage interest, property taxes) that will flow to the members in the LLC. Because the entity will end up taking a net loss (due to expenses including mortgage interest, depectiation etc. net of rental income), this loss should flow to the members irrespective if they are over their personal mortgage interest deductibility cap. Because it is a real estate investment, the loss should be considered passive (and therefore can only be offset against passive income or carried forward). Additionally, because it is an investment entity and not a second home I own, I would think it may not be subject to the same personal use limitations.

I was hoping I might be able to get some thoughts from the community around a potential real estate investment I’m considering making. Here is the general scenario:

• Establishing a multi-member LLC in which my spouse and I will be the members. The LLC will be taxed as a partnership and will not be considered as a disregarded entity for IRS purposes.
• The asset we are purchasing will be a condo in Colorado (we live in CA). The LLC will purchase the real estate asset and we have a lender that will be providing the loan (we are personally guaranteeing).
• We intend the property to generate rental income as well as capital appreciation over time. We will rent out to third-parties and will also utilize the property around our vacations (with the intent to pay market rent to the LLC).
• We would expect the property to generate a tax loss (largely as a result of depreciation expenses). We have sufficient passive income in which to utilize the passive losses that are generated by this real estate investment.
• I’m already capped on interest rate deductibility and property taxes as a result of my primary residence.

Questions:

• Since the FTB in California will charge an $800 annual fee for being a member of a LLC irrespective of whether it is an in-state or out-of-state LLC, seems like it would be easier just to form the LLC in CA?
• Since this structure should be treated as an investment property as opposed to a second home, are there any limitations in our personal use so long that we pay market rents?
• What other considerations should I be thinking about?