How Do I pay myself from my rental homes?

[ahsoka11]

I have like 8 rental properties on my sch E that I manage and do make a small profit. I want to be able to deduct my health insurance as Self employed health insurance because it is very high. I was thinking of setting up a separate management company and having each property pay some fees.  I will add a schedule C to my return for the management company. I know I will have to pay Self-employment Tax but I pay 12k+ in after tax health insurance premiums so if I pay myself 12k, even after paying self-employment taxes, I will come out ahead. The question is - is this OK to do? This is for next year.

[Hal_Al · Accepted solution]

You should ask a professional accountant about that specific proposal.

Another way to look at your situation is: are you a landlord or are you in the rental business? If you are a business, you simply report your rental income and expenses on Schedule C instead of Schedule E. That will allow you the self employed health insurance deduction.

For a discussion on whether you qualify as a business, see a similar question at https://ttlc.intuit.com/questions/2439507-can-i-report-my-rental-income-on-schedule-c-instead-of-sch...

[ahsoka11]

Thanks Hal. The reason I don’t want to turn my rentals into a business is because I don’t want self employment taxes on the whole thing. I was hoping by each rental paying management fees to me I could avoid paying self employment tax on entire profit and just pay it on the fees.

[Hal_Al]

I don't think that is allowed

[ahsoka11]

Is it illegal?

[Hal_Al]

I'm neither a lawyer or a CPA.  But, I believe this is what is known as a "sham" transaction for the purpose of tax avoidance and would not be allowed.

If you think your property management is extensive, then you may have a Business and ALL the rental income should go on Schedule C.  

I would  do what you propose without consulting a pro.

[ahsoka11]

I don’t want to do anything illegal but it seems like it would be “fair” bc if my employer had  health insurance plan it would be deducted pre-tax. But my employer doesn’t. I am just trying to do the same thing :(  I have a regular job also so the rentals are just a small part of my income. thanks for your help

[TaxGuyBill]

I agree, it seems like a 'sham' or tax-avoidance scheme.  I wouldn't do it.

[Rick19744]

Management companies are set up quite often.  However, the IRS scrutinizes these structures and the only way they will pass the muster is if there is a good business purpose behind it.  Saving state income taxes has been accepted as a legit business reason in some contexts, however, it is doubtful that you could support a solid business reason to set up the management company given your facts and situation.