I started an LLC last year - I do not want dealer classification for tax purposes. Also, the IRS does not recognize RE Investments as an actual business for deducted losses etc.? How do most investors utilize the LLC - as a holding company only - with no business deductions etc? Or are they classified as RE Management Companies when your primary goal is to buy/sell hold/rent etc?
talk to a good CPA.
a business to the irs is simply an entity that is out to make a profit. it measures intent and reasonability of deductions and looks to see if the business is trying to make a profit.
they crack down on hobbies and people who try and write off expenses on hobbies - additionally, they look for tax shelters where entities never intend to make a profit, but hold real estate for the purpose of claiming deductions…
best you talk to a cpa. a business can be based on anything to the irs - as long as you pay the appropriate taxes.
they categorize businesses in order to make it fit, to make things “easier” for them.
if profit is the goal - that’s a great start for the business and therefore the subsequent tax deductions.
many LLC operate as a disregarded tax entity; otherwise it can be taxed a corporation.
in short, if you are renting out property, it is very highly likely you need to use SchE of 1040; if you read the instruction for ScH C (for business activities), you will see that there are a number of test to pass and some real estate activities are expressly excluded from using Sch C. In a way Sch E of the 1040 tax form is a specialized version of SchE set up expressly for rental activities and royality income. You charge your expense on SchE as well.
dealer classification is on a property by property basis. If you buy property with the intent to resell, then you are a dealer for that transaction. If you buy it and rent it and then later sell it, you are likely not to be a dealer for that particular property. These are some broad statements so you are best advised to consult a tax professional (CPA or EA) for your specific case
Also, the IRS does not recognize RE Investments as an actual business for deducted losses etc.?
huh?
you are taxed on income. income is revenue minus expenses. all expenses related to the production of income are deductible. always.
NYCATLHOLDINGS,
I can see that you are confused.
An LLC is a legal business entity established under and governed by state law. Each state has its own LLC law. The IRS, however, has no provisions in its tax code for the taxation of the LLC.
Therefore, since the IRS does not recognize the LLC as a taxable entity in its own right, an LLC, by default, is treated by the IRS as either a sole proprietorship (single member) or a partnership (at least two members). If you wish your LLC to be taxed as a corporation then you must file an IRS form to that effect.
Let’s say you are a single member LLC and did not elect to be treated as a corporation for federal income tax purposes. By default, your LLC is a sole proprietorship, or a disregarded entity in IRS terms. As a disregarded entity, the LLC does not file a tax return. Instead all your rental income and expenses are reported on your personal 1040 as if the LLC did not exist, i.e. reported on Schedule E (1040).
Regardless of the tax treatment elected for federal income tax purposes, the LLC is a legal business entity for all legal purposes under state law and you still get all the legal protections afforded the LLC under state law.
Does this help?