I have a rental property, but because my income is greater than $150K I cannot claim any losses. if I place the property in an LLC, would I be able to claim the losses?

[rafmarino]

There is currently no profit being generated on the property at this time.  Is there a tax benefit to adding the property under an LLC and claiming business losses rather than rental property losses?

[ChristinaS · Accepted solution]

No. The only way to bypass the Passive Loss Rules is to be a Real Estate Professional. Owning property in an LLC doesn't make the losses any more deductible.

If you owned the property in a Single Member LLC, your Schedule E and related forms would show no difference whatsoever. If you owned it in a multi-member LLC, the losses would still be rental real estate losses. The same rules.

If you are not a Real Estate Professional, bear in mind that the suspended losses will be released when you sell the property (regardless of your income). You can also use the losses to offset other passive income, such as an investment in a partnership.

The IRS published this handout. May be a few years old, but good info:

https://www.irs.gov/pub/irs-utl/33-Real%20Estate%20Professionals.pdf

[Yez]

Is this 150k limit per person? Like what if a married couple files jointly?

[Critter-3]

It is per return ... if a married couple files separately you only get 1/2 of the allowance. 

[Carl]

There is currently no profit being generated on the property at this time.

That's normal for long term residential rental property. It is not common for long term residential rental property to ever show a profit in any year "ON PAPER" at tax filing time. Especially if there's a mortgage on the property.

Is there a tax benefit to adding the property under an LLC and claiming business losses rather than rental property losses?

No benefit at all. An LLC is nothing more than a pass-through entity. Putting the property into an LLC changes nothing on the tax front. The rental income/expenses still ends up reported on SCH E on your personal 1040 tax return.

[michael374]

I thought an llc puts it’s expenses on schedule c.  That how turbo tax makes you do it. Are controdicting this by saying that llc tax rules are different for a business that buys  and sells and rents real property?

[M-MTax]

I thought an llc puts it’s expenses on schedule c. 

Only if the LLC provides significant services to renters OR is a real estate dealer. Anything else gets reported on Schedule E for a single-member LLC or Form 8825 for a multi-member LLC filing a 1065.

[michael374]

Is an llc without a real estate licensed professional considered a dealer if they buy and sell over 6 properties a year? If so are the property sale gains treated as ltc gains and the expenses treated as deductions against income both for the llc and as pass through losses against the individual filer w2 income?

[M-MTax]

Is an llc without a real estate licensed professional considered a dealer if they buy and sell over 6 properties a year?

Yes, if your primary purpose for buying the properties was to flip them for a profit.

There are several factors you need to consider:

1. The purpose for which the property was acquired;

2. The purpose for which the property was held;

3. Improvements, and their extent, made to the property by the taxpayer;

4. The frequency, number, and continuity of sales;

5. The extent and substantiality of the transaction;

6. The nature and extent of the taxpayer’s business;

7. The extent of advertising or lack thereof; and

8. The listing of the property for sale directly or through a broker.

[michael374]

Not sure I understand 5-8

If an llc acquires fixes up and sells properties using a realtor, the following wouldn’t apply but would they exclude an llc being considered a dealer?

5. The extent and substantiality of the transaction;

6. The nature and extent of the taxpayer’s business;

7. The extent of advertising or lack thereof; and

8. The listing of the property for sale directly or through a broker.

[M-MTax]

No one of the criteria controls. You have to look at the totality and intent is typically the controlling factor together with the number of transactions (i.e., the more you flip, the more it appears as if you're a dealer).

If you're flipping 6 per year, you're likely a dealer.

[michael374]

Gotcha.you sure seem to know your stuff.  Thank you!

One more: if you are a dealer, could you sell properties and have long term cap gains and in the same year have no income (because you stopped renting sell) and end up will an income loss due to deductions that would pass through and deduct against personal w2 income since it’s an llc?

[M-MTax]

Did I read your question correctly?

If you're a dealer, then your real properties (real estate) that you buy to flip for quick profits (hopefully) are considered inventory and the gains/profits on those transactions are considered ordinary income, not capital gains (either short or long term). Similarly, losses on sales are considered as ordinary losses, not capital losses.

If you're a single-member LLC, those transactions would wind up on Schedule C as sales of inventory.

[michael374]

Ok so not capital taxes for dealers in a single member llc as all considered income that winds up on  schedule c.  What about the businessndeductions against income when there is no income for that year?

[M-MTax]

Re deductions, they would be reported on Schedule C and could create an NOL ( or just a net loss on Schedule C which would be deductible against all of your other income).