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I have 3 rental properties that I would like to move to a LLC

or S Corp or Partnership...
I have 3 rental properties that I would like to move to a LLC or S Corp or Partnership and what to understand which is the best structure for tax purposes. Currently I have annual income over $250k (not including rentals) and my income level does not allow for any deduction for rental property. One other point - my son is also a partner with me on the rentals and we plan to continue to buy one property per year. How do I make the decision on best structure? State is Ohio
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Answered in 1 minute by:
5/18/2013
Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16,592
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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Customer: Thanks for asking your question! I'm sorry to hear about your tax issue and I'm going to try my best to help you understand or resolve it.
Customer: The best structure would be an LLC
Customer: When you choose the tax structure of the LLC, you would want a partnership.
Customer: Do NOT put your rental property in an S Corp.
JACUSTOMER-tuggvc7p- : can you share why not s corp
Customer: If you put your rental property in an S Corp you will have to pay yourself a reasonable salary
Customer: And therefore you will have to pay tax on some of the income, even though you generate a tax loss
Customer: So, the S Corp is not an optimal structure
JACUSTOMER-tuggvc7p- : will i be able to get tax benefits of the loss pass through even with my income level?
Customer: No, you will not
Customer: no matter what structure you choose
Customer: it will still be passive income subject to the same loss limitations
Customer: this is true whether you were an S Corp, partnership or LLC
JACUSTOMER-tuggvc7p- : so is real estate treated different than other S corps for pass through loss? I modeled with turbo tax and it appeared the loss passed through and lowered my taxes. Perhaps I did not answer the question correctly
Customer: An S corp rental real estate loss is treated just like any other rental activity loss
Customer: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Passive-Activity-Losses---Real-Estate-Tax-Tips
Customer: Revenue Code Section 469 was enacted to discourage abusive tax shelters, its impact extends far beyond shelters to virtually every business or rental activity whether reported on Schedules C, F, or E, as well as to flow through income and losses from partnerships, S- Corporations, and trusts.
Customer: That last paragraph was from the IRS
JACUSTOMER-tuggvc7p- : So seems there is no benefit for me move properties into a structure if I cant create any tax advantage. What is the income level where the passive loss is eliminated?
Customer: The passive loss begins phase out at 100,000
Customer: and is totally eliminated at 150,000
Customer: Moving the properties into a structure such as an LLC gives you liability protection
JACUSTOMER-tuggvc7p- : From IRS site: Special $25,000 allowance. If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that is disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income
JACUSTOMER-tuggvc7p- : I do actively participate - does that make a difference?
Customer: YOu make too much money
Customer: That phases out at $150,000
Customer: you said your income was $250,000
JACUSTOMER-tuggvc7p- : yes
Customer: the phase out begins at 100,000 and is completely gone at 150,000
Customer: the only way to deduct rental losses is if you are a real estate professional. Do you have a non-working spouse?
Customer: You would have to spend more time on rentals than you do your other job, with a minimum of 750 hours
Customer: Are you still there?
JACUSTOMER-tuggvc7p- : what about Material Participation? I do put in more than 100 hours per year. Does that make a difference?A trade or business activity is not a passive ac-tivity if you materially participated in the activity.Material participation tests. You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests.1.You participated in the activity for more than 500 hours.2.Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity.3.You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who did not own any interest in the activity) for the year.
Customer: No, it does not make a difference in the case of rental property. Only if you are a real estate professional can you deduct the rental losses if your income is higher than the limit
Customer: This would mean you would have to spend 750 hours per year on rental activities
JACUSTOMER-tuggvc7p- : OK . I tried. Thank you
Customer: and you would need to file a statement to aggregate your properties as one activity
Customer: or else each property you would need to spend 750 hours a year on
Customer: Is there anything else I can help you with yoday?
JACUSTOMER-tuggvc7p- : no. thank you
Customer: If not, please rate my response as "excellent" so that I may receive credit for assisting you today
Customer: Okay, if you would please rate my response as "excellent" so that I may receive credit for assisting
Customer: Thank you for your positive rating. Please come back and see me any time you need a question answered. It was a pleasure working with you today.
Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16,592
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Verified
Megan C and 87 other Tax Specialists are ready to help you
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Customer reply replied 4 years ago
Can I ask one more question?
Sure, Glenn, go ahead
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Customer reply replied 4 years ago
Should I still consider LLC for carry forward loss?
You will carry forward the loss regardless if you are an LLC or individual. Once you dispose of an activity, you will be able to take those losses. Any tax structure you choose will allow you to do this. Any carry forward loss incurred before you change your business structure will transfer to the new business. SO, for instance if you had a $10,000 carry forward loss and then chose to go to an LLC, the LLC now would have a $10,000 carry forward loss. You would take that loss once you dispose of the activity.

Thanks
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Customer reply replied 4 years ago
Very last question - based on what you know should I go LLC or LP? Thanks
I would go LLC, that's what I would personally do.

Thanks
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Customer reply replied 4 years ago
Final final thoughts / questions / comments. My son and I are equal partners , however have different level of paid in capital for each property. Can I put loans on book of LLC for difference to balance? Going forward I am going to explore funding through a self directed IRA. Not sure how that would work since I assume the IRA would have to acquire stock, dies this make a difference in previous comment with preference to LLC over LP?
Customer reply replied 4 years ago
Did you get my last question
The LLC is still the best way to go. You don't purchase stock, you just get an ownership interest. And you and your son can have different ownership percentages and different capital balances. That is not a problem.

Thanks
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Customer reply replied 4 years ago
Would a self directed IRA be able to invest in LLC? I would think actual stock would have to be issued to the IRA. Can I consult with you off line ?
A self directed IRA LLC can invest in real estate, but it would be very difficult to invest in the same LLC that you are working with personally because of self dealing rules. However, you could have an IRA LLC invest in individual properties. CLICK HERE for more details.

And unfortunately we cannot have contact with customers off the site. Thanks.
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Customer reply replied 4 years ago
Do I have to have a formal partnership structure with my son and get a federal ID or can we both just list our percentage of income and depreciation on schedule C?
You do not have to have a formal legal partnership agreement, but you will always need to fill out form 1065 partnership tax return. You can't just break it down on separate schedule c's.

Thanks!
Ask Your Own Tax Question
Customer reply replied 4 years ago
So no fed tax ID is required other than our individual SS #s?
When you have a partnership, the partnership itself will have an EIN so you will have to apply for one of those. Sorry I didn't address that in my last message.

Thanks!

Megan
Ask Your Own Tax Question
Customer reply replied 4 years ago
Why is EIN necessary if it is just an informal ownership structure with my son? To obtain an EIN do I have to have a formal partnership structure like an LLC? If I move properties to LLC then I have to get commercial insurance on properties. I am looking for the simplest way to report. Thanks

Thanks, Glenn

You simply apply for the EIN using form S-4. You do not have to have a formal partnership structure to do this.

 

You have to have this because the IRS needs a unique number to keep track of the records of this partnership
Thanks

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Megan C
Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16,592
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Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level

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