Accounting for a Repayment of Loan to an LLC re Self Employment Tax

[pwapub]

Hi all,

My spouse and I - who file jointly, set up an LLC to which we lent $200,000 for down payments on rental property investments. The LLC purchased a property which has been rented all last year. As the rental property (LLC) earns net income, the LLC is paying back the loan to my wife and I at an interest rate of 5%. As I understand it:

1) The LLC reports the rental income and reports a deduction for the interest paid to my wife and I.

2) I (my wife and I) report the interest income (and the net income from the LLC is passed through), and Turbotax calculates the correct taxes that I owe.

So the issues are:

A) Regarding the effect of the loan repayment - I believe I only have to pay quarterly self-employment tax on the income that the LLC pays my wife and I that is not loan repayment. If all the LLC net income is considered loan repaymentIs then I do not pay any quarterly self-employment tax. However when I file my annual returns, I end up effectively paying income tax on the LLC net income anyway. Hence the only difference is that I am not obliged to pay self-employment tax quarterly. Is this correct? Are there any other considerations that I should be aware of here?

[Anonymous_]

You might want to read through the article below, particularly the self-charged interest rules.

https://www.thetaxadviser.com/issues/2018/oct/loans-members-llcs.html

Regardless, net rental income is typically considered passive income and not subject to self-employment tax in any event, except in certain circumstances, Perhaps you can further explain your operating procedures with respect to the LLC and the exact nature of your involvement (and types of properties).

You could certainly benefit from guidance by a local tax professional.

[pwapub]

Thanks for your response. Not sure what information would help you better answer my question.

The LLC is owned jointly by my spouse and me.

I am attempting to use Turbotax Home and Business myself to account for this situation properly.

My wife is a full time real-estate agent and we actively manage the properties the LLC owns (we set rents, clean the place between tenancies, advertise it etc.).

The properties owned by the LLC are corporate rentals - i.e., furnished rentals that are typically rented out for periods of over 30 days (typical period is 2 months to 12 months). The loans to the LLC were for down payments and to furnish them. I previously stated that there was one property owned by the LLC. There are actually two - but I figured the solution would be the same either way.

The issue is really to know what should be done and then how to correctly put that into Turbotax. 

[Anonymous_]

It appears as if the primary issue here involves self-employment tax. Unless your wife is including commissions from selling real estate, there should be none with respect to the income from the rental properties.

The properties, themselves, should be entered in the Rental Real Estate Income section of TurboTax Business.

[pwapub]

Hi Champ, Thanks for your response. While my wife did get paid a commission for the purchase of the properties, the commission was ultimately paid by the seller and her real estate business is separate LLC from the one that owns the property. This line of questions primarily concerned Self Employment Tax issues resulting from rental income.

By the way are you a tax professional?