Investors & landlords

Nope, the EIN doesn't go anywhere. Let me save you some time too.

Do not waste your time or money putting your rentals in an LLC. The IRS considers a single member LLC to be a disregarded entity. Therefore, you do not and can not report your rental income and expenses on SCH C. You *HAVE* to report them on SCH E. So if you create an LLC and put your rentals into that LLC, you will still report all rental income and expenses on SCH E. You will report absolutely nothing concerning your rentals on SCH C. Nothing what-so-ever.

Here's some of the Q&A's I see on this most often.

Q: Can I put my rentals into an LLC?

A: Of course you can. Buy why? It changes nothing what-so-ever for how you report your rental income and expenses on your tax return.

Q: Won't putting my rentals into an LLC provide me a "veil of protection" should I ever be sued by a tenant for liability"

A: Not really. The "veil" provided by an LLC is so thin that it's practically worthless. It's extremely easy for a lawyer representing the plaintiff in a suit, to "go around" your so-called veil of protection offered by an LLC, and take you for everything you own.

Q: Are there any other drawbacks to putting my rentals in an LLC?

A: Yes, and they are many. But the major one is if you have a mortgage on the property. You can't just go willy-nilly and change the name on the deed from your name to the LLC's name. You need the mortgage holder's permission to do that. No mortgage holder in their right mind is going to grant you that permission either. If you default on the loan, they don't want to risk not being able to go after your other assets, however minimal that risk may be. The lender just isn't going to allow it.

Q: Why can't I report my rental income and expenses on SHC C as any other business does?

A: While it's true that renting out property is a business, it's not like other more common businesses. For example, if you work from home selling stuff on e-bay, the income you earn by doing that is "active" income; meaning that you actually have to "do something" on a recurring basis to earn that money. That business income is reported on SCH C and is subject to the additional 15.3% self-employment tax which goes towards your Medicare and future social security benefits.

But rental income is "passive" income. All you do is "sit there" and collect the rent each month. You don't "do" anything on a recurring basis to earn it. Therefore, passive rental income (unlike active business income) is not subject to the additional 15.3% self-employment tax, since you don't "do" anything to earn it. Rental income also does not count when figuring your tax deductible or tax deferred retirement plan contributions either. (both traditional and ROTH). It also doesn't count for social security.

Q: What if I put my rentals into an S-Corp?

A: All that does is require the S-Corp to file it's own physically separate 1120-S tax return. The rental income to the S-Corp is still passive income, and it's still reported on SCH E by the S-Corp. So tax-wise there's absolutely no benefit.

Q: How about if I file the 8832 requesting the IRS treat my LLC "like and S-Corp"?

A: Of course you can do that. It still changes nothing on the tax front. The S-Corp will still report all rental income and expenses on SCH E. As for that better "veil of protection" an S-Corp offers, you won't get it. Just because the IRS and your states Division of Corporations agrees to treat your LLC like an S-Corp for tax purposes, does not in any way obligate the courts to treat your LLC like an S-Corp, in the event your are sued by a tenant for liability.

Q: So what can I do to protect myself and my assets if I am ever sued by a tenant?

A: Check your insurance policy on the property. Traditionally, all rental dwelling insurance policies will include at a minimum, $300K of liability protection. You can raise that amount if you so desire. Where I see the biggest blunders on this, is when a property owner moves out and converts their primary residence to a rental, yet fail to update their insurance policy.

While living in the house as their primary residence, they carry a "homeowner's policy" on the property. Such a policy covers absolutely nothing if the house is used for anything other than your primary residence.  Upon vacating the property and converting it to a rental, it's imperative the property owner contact their insurance agent to convert the homeowner's policy to a rental dwelling policy. If that's not done and a claim is file "for any reason", then chances are high the insurance company can (and will) deny the claim and have every right to do so since the property was not being used for the purpose it was insured for under the homeowner's policy. If the losses are high, the mortgage holder is not going to be happy and that will create more legal problems for you.