How can I use LLC's rental income from a property to make mortgage payments for that same property when the title is not on the LLC? Title and mortgage are on my name.

Bottom line is, the lender recognizes only those listed on the loan and the title as the legal owners, and only they are legally liable for the payments. However, the lender doesn't really care where the payments come from, so long as the payments are made.  Heck, they wouldn't care if the mortgage payment came from Prince Nigel in Nigeria, so long as the check cleared. So there's no problem with the check coming from your multi-member LLC.
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.

Also you will need to file the partnership return for this multi member LLC by 3/15 every year before any partner can file their personal tax returns ... PLEASE seek legal/professional advice to get your books set up correctly and to get educated on how to conduct the business properly because mistakes made by a partnership can be very expensive to fix down the road.

@Carl Thanks for your quick response. Regarding the last comment you made, why would the lender consider this a violation, if I was the one making the mortgage payment? I mean, the LLC will pay me, and I will pay the lender. From the lender's perspective, the person paying is the person on the title/mortgage.

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?

@Critter#2 I think I will seek out professional advice. Do you suggest I go to a certain type of CPA for this? I want to understand some basics, and terminology before I reach out to them. I'm trying to get to the right questions to ask when I reach them for help.

Interview them and ask if they have experience with partnerships, are they willing to teach/educate you, do they do the actual work or do they hand it off to the staff, will they  file you timely or will they just put you on extension, what are their timelines & cutoffs for getting paperwork to them, will they also do or set up the books and what are the fees.

 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.

@Critter#2 Goods points that I'll surely use. Thanks!

Deleted because was confused with another post on a similar issue for an S-Corp.

@Critter#2 There's a misunderstanding here. It's a partnership LLC, haven't elected S-Corp.

Ignore Carl's post since that doesn't apply to you.

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 !!!!

@Rick19744 Thanks for taking the time to go through all the detail, and providing your detailed response. It's helping me to get closer to understanding my situation. So far, it looks like it's best to rent it out directly (without bringing the LLC into the picture) for the time being.

You're welcome and I agree.  Still best to sit down with a tax professional at some point to understand your LLC mechanics both for the entity and the member's individually.

Can you recommend which tax professional you chose in Texas?

We are not allowed to recommend anyone on this forum ... here is a listing of paid tax pros in TX ... look for an Enrolled Agent or CPA ...  <a rel="nofollow" target="_blank" href="https://www.ptindirectory.com/tax-preparers/texas">https://www.ptindirectory.com/tax-preparers/texas</a>

"Our main intention is to use it for holding real estate properties as we purchase them for renting out."

The above caught my eye. I would suggest you read all the below so you are more educated on the options and the potential ramifications of putting a rental property into an LLC. It does not offer the protection you may be mislead to believe, and can cause massive legal problems if you don't know what you're doing.

Sole Proprietorship – This is a business with one owner, and only own owner. There are no other investors or share holders. This type of business is considered a “disregarded entity” by the IRS. All income and expenses for the business are reported  on SCH C as a physical part of the owner’s personal tax return. Again, a sole proprietorship has only own owner. Depending on what state the business is in, registration is not required at the state level. But it may be required at the county, town, or other level of government below the state. For example, your county may require you to register and obtain a county issued Occupational License, which authorizes you to conduct business only within the jurisdiction of the authority that issued the Occupational License. This is most often required when the county, city or other authority below the state taxes personal income or imposes a tangible property tax on business assets utilized to produce business income.

Single Member LLC - This is a business with one owner, and only own owner. There are no other investors or share holders. This type of business is considered a “disregarded entity” by the IRS. All income and expenses for the business are reported  on SCH C as a physical part of the owner’s personal tax return. Again, a single member LLC has only own owner. This type of business is required to be registered at the state level, weather that state taxes personal income or not.  Additionally, this type of business may also be required to obtain an Occupational License for the county(s), city(s) or other more localized jurisdictions within that state, in which the business will be operating in.

Multi-Member LLC – This is a business with more than one owner.  It’s also the exact same as a Partnership (for tax purposes) This type of business also has to register at the state level, and may also be required to obtain an Occupational License from more localized jurisdictions within the state, in which that business will operate.  This type of business will file its own physically separate tax return with the IRS (and state if applicable) referred to as a Partnership Return, on IRS Form 1065. When completing the 1065 (using TurboTax) the business will issue each individual owner a K-1 reporting the income (or loss) of each owner. Each owner will use this K-1 to complete their personal return. So an owner can’t even start their personal return, until after the 1065 Partnership Return has been complete, filed, and all K-1’s issued to all owners.

In the community property states of Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico, and Wisconsin if you have a multi-member LLC where there are only two owners, those two owners are legally married to each other, and those two owners will be filing a joint 1040 tax return, they have the option of splitting all business income and expenses down the middle and each partner reporting their share of the business income/expenses on a separate SCH C for each tax filer on the joint return. That means your joint 1040 return will have two SCH C’s included with it – one for each owner. But this can present its own problems in the event of divorce, separation. The issues can become even more compounded upon the death of one of the owners. If that deceased owner’s will does not pass all assets to the surviving partner, then that surviving partner can find themselves in a tax hell, not to mention the problems that can arise with the “new” owner or owners.

LLC “Like an S-Corp” – For tax purposes only (and I reiterate: FOR TAX PURPOSES ONLY!!!!!) one can elect to have the IRS treat their single member LLC or multi-member LLC “like an S-Corp” ****FOR TAX PURPOSES ONLY!!!!!****  This means your business is treated like and considered to be a physically separate taxable entity. This is accomplished by filing IRS Form 8332 – Entity Classification Election. This allows you to act as if your single member LLC or multi-member LLC is an S-Corp. But understand that if you want the IRS to treat your LLC like an S-Corp, then the business “must” act like an S-Corp, and follow all the laws, rules and regulations required of an S-Corp by whichever state your LLC is registered in. All business income and expenses is reported on IRS Form 1120-S – Income Tax Return For An S-Corporation. The S-Corp will then issue each owner, investor and/or shareholder a K-1 which they will need before they can even start their personal tax return.  Unlike a single member LLC which is considered a disregarded entity for tax purposes, an LLC that has filed form 8332 – Entity Classification Election  “is” considered and treated like a separately taxable entity.

S-Corp – This type of business is registered at the state level and must conform to the laws, rules, regulations and ordinances of that state which apply to an S-Corp. All business income and expenses is reported on IRS Form 1120-S – Income Tax Return For An S-Corp.  The S-Corp will then issue each owner, investor and/or shareholder a K-1 which they will need before they can even start their personal tax return.  Unlike an LLC which is considered a disregarded entity for tax purposes, an S-Corp  “is” a separately taxable entity, and therefore files its own physically separate tax return and issues K-1’s to all owners, officers, investors and shareholders.

C-Corp - This type of business is registered at the state level and must conform to the laws, rules, regulations and ordinances of that state which apply to a C-Corp. All business income and expenses is reported on IRS Form 1120 – Income Tax Return For A C-Corp.  The C-Corp will then issue each owner, investor and/or shareholder a K-1 which they will need before they can even start their personal tax return.  A C-Corp  “is” a separately taxable entity, and therefore files its own physically separate tax return and issues K-1’s to all owners, officers, investors and shareholders.

Additional Information For Rental Property Owners

Occasionally a rental property owner will be “convinced” they need to put their rental property into an LLC (be it single owner or multi-owner LLC) as a means of protecting themselves and their personal assets from legal litigation should they ever be sued by a tenant. The property owner is told the LLC gives them and their personal assets a “veil of protection” from any legal litigation that may arise as the result of legal actions perpetrated by a rental tenant. Nothing could be farther from the truth.  If you check court records (even in your local area) you’ll probably find numerous cases where a tenant sued their landlord and the LLC provided practically no protection of the property owner’s assets. That “veil of protection” supposedly offered by an LLC is so thin, even a new first time lawyer has no problem piercing that veil and attacking the personal assets of the property owner on behalf of the tenant. There are other problems and issues with this too.

In order to legally transfer ownership of rental property to an LLC, the owner must have the permission of the mortgage holder. No lender in their right mind will give this permission either. Even if you think you can refinance the property or “sell” it to your LLC, unless your LLC has the cash on hand to pay for it in full, your LLC will never qualify for the mortgage loan. The lender doesn’t want to risk your LLC going under (by filing bankruptcy for example), and they lose money because of it. So I’m confident in telling you, that’s not going to happen.

When you create an LLC for your rental property, it’s generally understood that business income gets reported on SCH C as a part of your personal tax return. However, a SCH C business produces “earned” income, and a rental property produces “passive” income. What’s the difference?

Earned income is income which you have to do out and “do something” in order to earn it. This income is subject to regular income tax, and also an additional 12.6% self-employment tax. The SE tax is basically the employer side of your social security and Medicare. But rental income is not “earned” income, and therefore is not reported on SCH C. So if you create an LLC for your rental property, then absolutely nothing concerning that rental property will be reported on SCH C. Not one penny of rental income and not one penny of rental expenses.

Rental income is “passive”. That’s because all you do with rental property on a recurring basis is just “sit there” and collect the rent every month. You are not “doing anything” to “earn” it on a recurring basis. That’s why rental income is reported on SCH E. Rental income is subject to regular tax, but is NOT subject to the additional self-employment tax. This means that rental income DOES NOT COUNT for your social security account or Medicare contributions.

SO if you create an LLC for your rental property, there are two things that will NOT happen.
  - You will not be able to “legally” transfer ownership of the property from you, to the LLC unless you have a really dumb lender.
 - You will not report one penny of rental income or one penny of rental expense on SCH C.

So in the end, you will be filing a zero income/expense SCH C with your personal tax return.

Now let’s say you decide to file the 8832 to treat your LLC like an S-Corp, and then you transfer ownership of the property to your LLC. You can and will report your rental income on SCH E as a part of the 1120-S Corporate Return, and you will also report the K-1 on SCH E as a part of your personal tax return. But keep in mind that this is for ***TAX PURPOSES ONLY!!!****. So if a tenant sues you, I seriously doubt the courts will recognize your S-Corp, and I seriously doubt the court will recognize the S-Corp as a physically separate owner of the property. Remember, that 8832 Entity Classification Election is for “TAX PURPOSES ONY”. It has no weight at all for any and all other legal purposes – such as you being sued by a tenant.

SO if you want to do this (and it still makes no financial sense) then form an actual S-Corp and transfer ownership of the property to the S-Corp. More than likely the lender won’t allow the transfer. But you can sell the property to the S-Corp if the S-Corp can qualify for a mortgage loan.  Overall though, it’s still financially dumb to do this. Here’s why I say that.

When you move out of your primary residence and convert it to residential rental real estate, you have to convert your homeowner’s insurance policy to a rental dwelling policy. Or if you buy the real estate as rental property outright, then you have to obtain a rental dwelling policy at that time.  A rental dwelling policy will, at a minimum, include $300,000 of liability coverage. For most that will suffice. But if the property is in certain areas of the country you may want more liability coverage. I have three rentals myself and have a total of $1,000,000 of liability on each. It cost me less than an additional $100 a year on the insurance for each property. So for me, it’s worth it. It’s also significantly cheaper not only in money, but in time spent dealing with corporate taxes and all that other additional paperwork crap.

One mistake I see quite often is that when an owner converts their primary residence or 2nd home to rental property, and they fail to update their insurance policy. This can bite when you have a claim. If the property is insured as your primary residence, but you are using it as rental property (which is other than it’s insured use) don’t be surprised when the insurance company denies your claim, and you can’t find any lawyers that will take your case.  If it’s a case of you being sued by a tenant, then to be honest and put it bluntly, you’re screwed.

Hi Carl,

Your post has helped me out a lot. I am one of those that was "convinced" to start an LLC to hold real estate for protection purposes. I did a lot of research at the time and I'm not sure why the kind of info you have provided didn't pop up!

Anyway, I'm commenting to ask you about the Schedule C vs. Schedule E thing. It seems that the differentiation is important but I don't understand why. Could you explain?

Eric

Hi Eric,
Being a landlord "is" a business, but not in the same sense that your local restaurant is a business.
 Both SCH C income and SCH E income are business income. But here's the difference.
SCH C income is income you earn by going out and actually "do something" on a recurring basis to actually "earn" that income. SCH C income is also subject to the additional 15.3% self-employment tax, on top of the "regular" tax you paid on that income. Basically, the self employment tax is the employer's side of your social security and Medicare accounts, so it's credited directly to your account. Additionally, SCH C income can be used in figuring your maximum allowed contribution to an IRA.
SCH E income is referred to as "passive" income. That's because you don't go out and "do" anything on a recurring basis to earn that income. Basically, all you do is "sit there" like a knot on a log and collect that rental income every month, week, or whatever the payment schedule is. While you also pay "regular" tax on this passive income, it is "NOT" subject to the additional 15.3% self-employment tax, and does "NOT" count for anything towards your social security or Medicare contributions. Additionally, since passive income is not "actively earned", it also does not count for inclusion when figuring your maximum allowed IRA contributions.
Now as for the legal ramifications, that's already covered in my original answer. But if you have two or more people who own a rental property who are not married to each other and are not filing a joint return, then you form a partnership, not an LLC of any type, be it a single member LLC or multi-member LLC.
Now both a multi-member LLC and a partnership file the 1065 Partnership return reporting all the rental income/expenses on SCH E as a part of that 1065 partnership return. Each partner gets issued a K-1 which they will need for their individual personal tax returns, and the values entered from the 1065 K-1 will be on page 2 of the SCH E on their personal 1040 tax return. So if you form a multi-member LLC, the income is still passive. Additionally, as stated in my answer above, I seriously doubt the mortgage holder will allow you to transfer ownership of a rental from the one or one's who are listed on the mortgage and the deed, to the LLC anyway. Lenders are in business to make money, and they would rather you "sell" it to your LLC so they can benefit from the closing costs and other fees you'd have to pay.