I have two rental properties. In addition, I am a physician who operates as a professional service S-corporation. One of the properties in question is my former residence; 2008 was the first year during which it was rented. I am an active participant in one (I painted, met the the tenant, etc.) and a passive investor in the other. I just learned about the $100K- $150K AGI limit on real estate losses; this will not be a problem in 2008 but will definitely be a problem in 2009.
My question is this: if my professional service S-corporation forms a single-member LLC and I transfer the titles to the LLC–> would I then be able to deduct the loss against the corporate earnings and therefore reduce the total amount of S-corporation distributions. [I do pay myself a fair wage from the S-corporation.]
This would be advantageous to me because I otherwise would not be able to use the paper loss from the real estate holdings to reduce my income on my personal 1040 since I will be over the $150K limit in 2009.
On a related note, could I also funnel corporate funds into the LLC and then purchase additional real estate?
It might be more advantageous to funnel excess cash into a c-corp and have the corporation provide benefits to you. It gets a deduction and you don’t pay taxes on the benefits you receive.
I can’t speak to the tax situation, but your question has prompted me to do some research.
The question may be moot if you can’t use the net passive loss allowance, but would you tell us a little more about your “passive” role in the other rental property you own? Are you a limited partner in a partnership that owns the property?
In the second property, I essentially gave money to a friend who financed and purchased the property; I will shortly be added to the title as a quit claim. There is no formal structure.
If my corporation formed a separate single-member LLC and the LLC was on the title of the properties could the depreciation and paper loss pass through to the corporation and then reduce the corporate income?
I think your situation is a little more complex than can be properly addressed in this forum. I would recommend that you make an appt with a local CPA who is familiar with real estate and put together a plan.
However:
I am an active participant in one (I painted, met the the tenant, etc.)
No, all rental income/loss is passive regardless of your level of activity.
I’m not sure your plan would work as you envision. The rental income would pass thru the LLC K-1 to the S-corp, but retain its rental income nature. Then it would pass thru to your return and still retain its rental income nature on the K-1. Then it would still be a passive loss to you.
I think. I’d want to research that, but I think that’s right.
I essentially gave money to a friend who financed and purchased the property; I will shortly be added to the title as a quit claim. There is no formal structure.
DANGER DANGER
This is a quick formula to financial ruin and/or loss of a friendship. Always, and I do mean always, reduce everything to writing. This is business with real money and real consequences.
Mark - Is this always true? I thought the rental income could become active income if you work more than a certain number of hours in the rental business during the year and don’t work in any other business more hours. I thought there were also another exception for real estate agents that own 5%+ of the real estate company they work for. Am I mixing two different things?
rental income is always passive EXCEPT in the case where it is incidental to another business. ( ie: real estate companies or rehabbers where rental is not the primary business purpose. This gets into dealer classification issues, etc, which I don’t want to get in to here).
the hours requirements are used in several places, but in no case will it make rent income non-passive. In one case you can claim yourself as a real estate professional, which removes the $25k annual loss limit (losses become unlimited) but note that the income is still passive.
well, let me clarify that. I think you may be thinking of a “real estate professional” where someone materially participates >50% of their time and >750 hours in real estate businesses.
In this case, the income is non-passive for a real estate professional and losses can be used to offset other earned income. But note that the income is still NOT subject to SE tax (I equated “passive” with “not subject to SET” in my earlier post. I have corrected the error.)
Employees in the real estate business can’t be a real estate professional unless they’re also a 5% owner. I think this is what you were referring to.
well, I attempted to correct the error, but received an error message stating that there was a login error, so I will have to let the erroneous post remain in error.
I think.
Rental income is non-passive for real estate professionals, but not subject to SET.