We formed an LLC this year in Texas. It's members are my family members. My wife and I are the managers. The LLC is allowed to form series, and do any type of allowed business in the state of Texas. Our main intention is to use it for holding real estate properties as we purchase them for renting out. In future, we could also do some consulting via one or more of the series.
purchased a property this year, we had started the loan application before we
formed the LLC, and could not get the lender to put the title on the LLC. So
the title for the property is directly on our names. I understand that we won’t
get the liability protection, which is the main purpose of the LLC. Eventually,
we hope to move the property title to the LLC.
I'm now getting
ready to lease the property out, and want to get some thoughts on how best to
do so from a tax perspective. Should I rent it out on our name, or the LLC's
name? Does it even make a difference?
What happens if we lease the property out on the LLC's name? We are thinking doing this will begin to establish an earnings history for the LLC. However, we want to use the rental income of the LLC to pay the mortgage installments. Note that the property title and the mortgage are on our names, not on the LLC. In order to use the LLC's rental income to make mortgage payments, do we need to have some sort of agreement between us, the title holders, and the LLC?
Please share your
thoughts, and questions as well. Thank you.
However, the bank will issue the 1099-Mortgage Interest Statement to the owners, not the LLC. But if whoever reviews the return at the IRS is paying attention, then it shouldn't be a problem when the LLC claims the interest and property taxes and insurance payments, if the LLC is registered with one of the owners of the property. You should make sure that "YOUR" SSN is the one the EIN for the LLC is registered with.
Do understand that with this setup and depending on the state the LLC is registered in, you could be in violation of the mortgage terms and it's possible the lender could call you on that - which could be quite costly.
An important question I have: when the LLC pays me, does it trigger an event that is considered taxable? I'm not familiar with the term, may be it's called distribution?
An Enrolled Agent may be cheaper than a CPA which is who the CPA usually hands off the work to in their office. I prefer a small operation as opposed to a big box store since you get more personalized service.
You need to seek advice from a tax professional that understands LLC's; some may claim they understand, but this entity structure is complicated and many traps for the unwary.
I also have the following comments:
- From your facts, it appears who ever set up the structure organized this as a series LLC. Not sure why. These entities add an additional layer of complexity on an already complex structure type. If you use the series structure to its full extent, this area has very little guidance from a federal income tax perspective and many unanswered questions from the tax practitioners that specialize in partnership tax.
- The LLC can't recognize income from a lease of property that it does not own. You could lease it to the LLC and then the LLC could sublease it. You need to get legal advice on how best to draft the appropriate documentation.
- This only complicates the issue. You will have an LLC leasing the property, collecting the $$, reporting this as income, passing through this income to the member's, the member's in turn reporting the lease income and then paying the mortgage and taking the mortgage deduction on their personal tax return. You also have the issue of how the bank reports the interest income; is this using only one member's SS#? If that is the case, then you are now compounding the matter even further.
- Your last question to @Carl relates to the tax reporting of the LLC. The member's will need to track their basis in their LLC interest and update this on an annual basis using the applicable lines on their K-1. Distributions from the LLC are only taxable to the extent they exceed your basis. The tax advisor you consult with should be able to provide some assistance in this area as well.
- Kudos to you for indicating that seeking professional advice is on your To Do List !!!!