Is it ok to pay property management fees from a single member LLC that owns an investment property to another single member LLC that is the property management company?

Forum|Forum|3 years ago
January 6, 2023
9 replies
154 views

I own a rental property through a single member LLC and also have a property management company with a single member LLC structure that manages the property. Both LLC's taxes pass through to my personal tax return. Is is ok to report property management fees/income on Schedule C & issue a 1099 from the property management LLC to the owner LLC which would deduct it on Schedule E? Since both LLCs taxes are on one tax return, I'm wondering if it's ok to have the property management income and expense deduction on the same return but different Schedules.

Best answer by Anonymous_

What is the rationale for charging yourself a management fee and reporting that fee as income on Schedule C while deducting that same amount on Schedule E?

Your single-member LLCs are actually not pass-through entities since pass-through entities pass through income, expenses, deductions, et al, to members, partners, shareholders (of S corporations), and beneficiaries of certain estates and trusts.

Your LLCs are different as they are indistinguishable from you for federal income tax purposes. As a result, you would need to have a business purpose for this transaction other than some sort of tax benefit. If not, then the IRS could disallow reporting as you intend on the grounds that it lacks economic substance.

Anonymous_Answer

Level 15

What is the rationale for charging yourself a management fee and reporting that fee as income on Schedule C while deducting that same amount on Schedule E?

Mike9241

Level 15

even a "business purpose" probably wouldn't work. even though there are two LLCs there is only one tax entity - yourself. it's like transferring money from your left to your right pocket. you have neither income or expense in doing this.

Mike9241

brewsjAuthor

Level 2

@Mike9241 @Anonymous_ Thank you both! For a little more background, the property was acquired with a 1031 exchange and we had to setup the ownership as tenants-in-common (TIC) with another entity which requires a property management company to manage the property. IRS requires this in order to honor the TIC agreement rather than classifying the ownership as a partnership which would nullify the 1031 in our situation.

Can you let me know if either or both of these options would work instead?

1) Only put the percentage of the property management income on my tax return that matches the % TIC ownership of the other entity. I think this works because as you said the ownership % of my other LLC is just like passing money from one pocket to another so that % shouldn't be considered income/expense.

2) File to have the property management LLC to be taxed as a corporation rather than a single member disregarded entity. This would would require a business tax filing but should allow the full property management income on that return and my ownership % of the expense on my personal return.