My business is buying rental property. I deed properties in my own name. The rent is deposited to the LLC bank acct. Can the LLC claim the income? The reason I care is that there are lots of business expenses (office equipment, vehicle expenses, etc.) that I'd like to write off, but it looks a bit fishy if my LLC shows no income.
You might say that I should write these items off on my Schedule E on my personal tax return. Many write offs don't fall under a specific property address that I own, but rather are general expenses required to research, acquire, and rent property. How do I write off "business" expenses for a business that has no income?
Is this a Multi-Member LLC (Partnership)? Or is it a Single Member LLC?
Has the LLC made any elections to be taxed as a corporation?
Your post indicates you are using the "Business" version, which is for Partnerships and Corporations. Is that correct? Or are you preparing your personal tax return?
Is it related to this?
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I HIGHLY recommend you seek a qualified bookkeeper & tax pro to get you set up correctly since these are confusing subjects and getting them wrong can cost you big time later.
Thanks for the responses. TaxGuyBill, yes I am using the "Business" version. SweetieJean, no, that is not related to this question. Critter#2, yes thank you, I do need tax pro advice... which is why I started asking here. So far nobody has attempted to answer my actual question....... anybody else?
They can't provide any guidance about what you might need to do until you answer TaxGuyBill's question about
1) whether it is a muti-member LLC/partnership with other people ....or just you (or just you and wife)
2) whether the LLC made any elections to be taxed as a corporation?
Ahh - thanks. The LLC members are simply me and my wife. The LLC has not made any elections to be taxed as a corporation.
that should help.
..I'm not particularly useful in this area...but someone or @TaxGuyBill should answer by the end of today
What state do you live in? That makes a difference for LLcs where the only shareholders are spouses.
I live in Alabama, but the LLC is formed in Delaware. The properties I own are in Alabama, Kentucky, and Florida.
Neither Alabama or Delaware is a community property state. That means that your 2-shareholder LLC must report and pay income taxes separately on form 1065 (unless you elect to be treated as a corporation and file form 1120). The LLC tax return issues K-1 forms to the shareholders who enter those forms on their personal tax returns.
You can't treat the LLC as a disregarded entity and file using schedule C.
How that affects the proposed transaction, I can't tell, but it may affect the other answers.
One comment I do have is that the IRS uses a substance over form doctrine when auditing. If a transaction is designed purely to look like one thing when it really does another, the IRS will tax you based on the other thing (the substance) and not the official form, especially when the form evades taxes.
I think the answer is, you're doing it wrong.
If you own the properties but don't collect income, then you have no way to write off expenses on schedule E. And if the LLC collects the rent but doesn't own the property, then it has income but no expenses. (The LLC could pay for repairs and other expenses but can't take depreciation.)
Why are you doing it this way? Why not own the properties in your own name and collect the rent in your own name; or, sell the properties to the LLC and have the LLC collect the rent and pay the expenses?
Potentially the LLC could lease the property from your and then sub-lease it to the tenants, but I think you need more professional advice on that--remember that free advice on the internet is worth exactly what you pay for it. Many people on this board are very knowledgeable, but don't expect us to stand with you if you are audited or if you discover that a particular transaction form leaves you in the lurch.
I agree with Opus.
So in direct answer to your question, "no". It seems to us that your LLC doesn't have any income or expenses. It doesn't own the property.
Although there have been some rulings that if the proper contracts are in place, you could hypothetically do it the way you are trying to do. However, there would be no purpose in going through the legal work to do that. It would be a lot of work and expense to set that up, and you still probably wouldn't have the "Limited Liability" that a LLC has (which is the purpose of the LLC).
For now, report the rentals on Schedule E (page 1) of your personal tax return. If you want protection of Liability, get a good insurance policy for that.
If you want the rentals in the LLC, you need to transfer ownership to the LLC. The would mean transferring the Titles, Mortgages, etc.. Also, the LLC would need to be registered in each State that is operates in.
As for the 'shared' expenses, just divide them up and allocate them between the properties.
You’re not alone in wondering this. My question would be if this is a single person LLC would the taxes pass through to my personal return so whether it was depreciation or MI it would ultimately be the same? That was I can at least show income to the LLC and possibly purchase through it next time?
My question would be if this is a single person LLC would the taxes pass through to my personal return so whether it was depreciation or MI it would ultimately be the same?
A single member LLC is considered a disregarded entity by the IRS. All income/expenses for a single member LLC are reported on SCH C as a part of your personal 1040 tax return. However, residential rental real estate produces passive income. So it's not reported on SCH C. All rental income/expenses get reported on SCH E as a part of your personal 1040 tax return. Nothing concerning the rental property would be reported on SCH C. So if rental property is all you have in the LLC, you have no need to file a SCH C at all.
The only way you would report rental income/expenses on SCH C, is if you are "in the business" of renting property and you provide substantial services that are directly beneficial to the tenants on a recurring basis.In other words, your rental activity would have to qualify as a "trade or business" per IRS rules. The IRS defines a trade or business at https://www.irs.gov/charities-non-profits/trade-or-business-defined The typical long term residential rental real estate does not meet that definition.
Thank you @Carl , My follow up question is that since the properties are in my personal name, and if I had the LLC set up as a "Property Management" with an operating agreement between myself and the LLC. Could the write offs from expenses of the rental property that are expensed by the LLC pass through to my personal return, and then I be able to write off interest and depreciation on my own 1040 (that's not passed through from LLC). I can have an umbrella policy for coverage, but would like to show some income to the LLC to be able to purchase properties through the LLC in the future with out losing tax benefits from the property. Thank yo again for your help.
@Clarkjd wrote:
....since the properties are in my personal name, and if I had the LLC set up as a "Property Management" with an operating agreement between myself and the LLC. Could the write offs from expenses of the rental property that are expensed by the LLC pass through to my personal return.......
If the properties are in your name and you have a single-member LLC (for "property management"), nothing "passes through" from the LLC to you, regardless of the operating agreement; the LLC is treated as a disregarded entity by the IRS and it is the same as if you had a sole proprietorship. You report all items of income and expense on your individual income tax return (Form 1040).
That makes sense, so if I did have rental income and expenses set up through the LLC bank account would that be suffice for showing income for the LLC and making future purchases through it? Thanks again.
Yes, but note that the LLC is still disregarded for federal income tax purposes. You would enter all items of income and expense on Schedule E of your 1040.
Ok cool, I think thats more what I am after is the LLC income for future purchases ATM.
Last question, if its a multi member LLC and the property is in my partners name, but we share income 50/50 it seems the consensus is that it wouldn't make sense to utilize the same method of running "property management" income/expense through an LLC because of no way of writing off depreciation/interest? Is it not is it smarter for him to claim all income and split taxes up on back end? or what are your recommendations?
Nothing changes. My earlier comment still stands. All rental income/expenses are reported on SCH E, and nothing what-so'-ever concerning the rental is reported on SCH C. Since an LLC is a disregarded entity by the IRS, there's nothing to "pass through" the LLC or anything else.
even on a multi member LLC?
If its still a Schedule E, but the LLC Bank account is showing money in and out does that suffice for real estate purchases?
@Clarkjd wrote:
even on a multi member LLC?
No. Multi-member LLCs (which default to partnerships for federal income tax purposes) report rental real estate income and expenses on Form 8825 and issue K-1s to pass through income or loss.
It is still unclear with respect to what you are trying to accomplish. Can you explain?
Scenario 1: I just want to be able to purchase property through an LLC. So i'd like to "manage" current rentals through LLC and show money in and out of the bank account created for the LLC.
Scenario 2: Multi Member LLC with a partner on a real estate deal. I manage the property he's a cash investor we split cashflow but I am not on the deed currently. What's the best way to handle this from a tax perspective?
because of no way of writing off depreciation/interest?
Why do you keep saying that? You report the rental income/expenses on SCH E. If you use the program the way it's designed and intended to be used, you will be asked for mortgage interest, property insurance, and the program (not you) will automatically figure the depreciation *for you*.
If its still a Schedule E, but the LLC Bank account is showing money in and out does that suffice for real estate purchases?
Again, the LLC is a disregarded entity. The IS does not, and never has recognized a single member LLC as a separately taxable entity. When you started the LLC you probably obtained an EIN for the LLC. That EIN was obtained directly from the IRS. When you applied for that EIN you were required to provide the IRS a Social Security Number. Any and all transactions associated with the EIN are associated with the SSN it's tied to.
There are only two entities that have any need to know what SSN that EIN is tied to.
1) The person or entity that applied for the EIN
2) The IRS.
That's it. Nobody else has any need to know. Not even the bank where you may have been required to provide an EIN to open a business account.
what are your recommendations?
Stop trying to go around your elbow to get to your thumb. You keep running into your kneecap. If you and the other owner are not married to each other and filing as single, simply split "EVERYTHING" straight down the middle and each of you report your share of income/expenses and everything else on your own tax return on SCH E.
Thank you for your help. I guess its still unclear if running income/expenses through the LLC will allow me to purchase in the LLC? I understand its taxed the same.
We can split everything but if I am not on the mortgage I will show income with no expenses outside of repairs and miss out on depreciation, interest and the mortgage at whole creating much more taxable income. Does it make more sense for him to claim everything?