Entity choice and IRS Passive Activity Loss rules

I have a question regarding my choice of an entity to use for my rental business and the IRS rules on Passive Activity Loss Rules. I was all ready to start using land trusts to hide ownership of my homes when I read that to use the $25,000 offset that the IRS allows for landlords that make less than $150,000 MAGI, the property cannot be held in a corporation or trust.
Since I make ~$110,000/yr as a pharmacist, being able to deduct any losses I incur in my rental business from my salary is a good deal.
Am I screwed out of the wealth hiding benefits of the land trust if I want to use this deduction?

Any thoughts?


depends. a trust is not necessarily a taxable entity. if the beneficiary of the trust is a single member LLC, you could still enjoy the benefits of a passive tax loss.

BLL will have to answer how/if that blows up the benefits of the trust.

I don’t see a real problem if the single member is an entity or individual who does not manage the property, but this type of planning moves beyond the guru-level and actually requires a true professional to set up and explain properly.

Thanks for the replies!

Yes, I was probably going to set it up the following way: Barely capitalized & risk-exposed C corp rental company handling the day to day stuff (rent collection, repairs, etc…) leasing the rental properties from the individual land trusts that have LLC’s as their beneficiaries. I was trying to figure out though how to have more than one member in the LLC’s, as single-member LLC’s have come under attack from creditors.

Any suggestions?

Where did you get the idea for this set up? It is convoluted and I don’t think it actually does anything except create a bunch of headaches for you.

This is a set-up that William Bronchick recommends for asset protection

I’m really surprised. His advice is usually sharper than that. The key to asset protection is subtlety and simplicity. It doesn’t get challenged because it doesn’t look like asset protection. If it does get challenged, then it looks legitimate and you get a settlement on your terms. Otherwise, the judge will rule against you if he doesn’t understand what you have done. He will just assume you are up to no good because it is so complicated. Another point most people forget is that a transfer with the intent to make it harder for creditors to collect is illegal and not respected.

Thanks BLL for the input. I’ve read a lot about fraudulent transfer laws and confusing schemes that judges won’t understand. To be honest, I don’t think the set-up I was talking about is all that confusing, or subject to the FT laws. However, since I’m here for advice, how would you go about doing it, or how do you do it for yourself (especially taking into account my concerns about single-member LLCs getting set aside?)


What do you mean by “single member LLCs getting set aside”? If you mean commingling and formality issues, then every LLC has that problem. SMLLCs are different because they have no charging order protection in bankruptcy. They fail when the single member has a judgment of around $12,000 and the creditor forces the member into involuntary bankruptcy. Since there is no charging order protection, the LLC assets are liquidated along with the member’s personal assets. The SMLLC isn’t so vulnerable when the single member is an entity that doesn’t generate liability.

If you mean lawsuit protection (which just about every one does when they use this term), then that statement alone is enough to undo everything. The law is very clear that transfers with such intent are fraudulent.

Here’s a snippet from the UFT Act. Many states use similar language.

  1. Fraudulent transfer. A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

A. With actual intent to hinder, delay or defraud any creditor of the debtor;

Is’nt the whole point of using an LLC (at least from an asset protection standpoint) the charging order protection?
You stated in your last post: “The SMLLC isn’t so vulnerable when the single member is an entity that doesn’t generate liability”.
That is the reasoning behind the set-up I was talking about-using a C-corp for the actual day to day operation (exposed to liability) of the rentals, with the C-corp leasing the valuable homes from land trusts w/multi-member LLC’s as the beneficiaries. I guess I would have to be one member, but if I got a second member (another investor, an irrevocable trust for my kid?) wouldn’t that create charging order protection if the creditor of the C-corp somehow managed to “jump the bridge” created by my leasing of the valuable properties?

Yes? No?


I think you are confusing the passive activity loss rules with the net passive loss allowance.

Passive activity loss rules apply to individuals, trusts, and to businesses where the taxpayer does not materially participate.

The $25,000 net passive loss allowance is available only to individuals and is subject to phase-out limitations based on modified adjusted gross income.

Generally passive losses are limited at the trust level. Unused passive losses due to the limitations in IRC § 469 are suspended by the trust. Passive losses can offset only passive income at the trust level. Unused passive losses must be carried to next year per IRC § 469(b). The $25,000 rental real estate offset cannot be used by a trust because trusts are not natural persons (IRC § 469(i)(1)).

I am not a CPA. Just how I see it.

There is no bridge to jump. The land trust and LLC are just as responsible as the c-corp since the corp is just an agent of the property owner. If you are the one managing the property in the name of the c-corp, you will be personally liable and all the c-corp assets will go to the creditor. It won’t matter if charging order protection for the LLC is upheld. The LLC is responsible and its assets will go to the creditor just like all your personal assets and the c-corp assets. Charging order protection shields members from the personal liability of the debtor member. The LLC will not be liquidated if there is a personal judgment against you for actions unrelated to the LLC. You’ll need some advanced planning to fill all the holes.