Can a 2-member LLC (husband and wife) be disregarded for tax purposes as long as we file a joint return?
no.
Mark, is there a way to structure this joint ownership in an LLC and have it pass thru rather than having it Sch. D or E?
LLC’s with two or more members may choose from the following tax methods:
-
partnership. pass thru entity (tax is paid on your personal return). rental income remains passive, flip income is ordinary and subject to SE.
-
c-corp. Not a pass thru entity. corporation pays its own taxes, cash distributions to you are taxed again as dividends.
-
S-corp. pass thru entity. rental income remains passive, flip income is ordinary, as above.
mult-member LLC income would never end up on Sch E or D of your personal return.
In what state did you establish your LLC ? If a community property state, the IRS will allow your husband-wife LLC to elect to be treated as a disregarded entity for tax purposes.
What is a disregarded entity? The LLC would still carry the same protection features, correct?
mcwagner, tax question. If you have 2 or more partners in an llc and a couple of the properties are not in the llc yet how would you tax that? Just on the persons income tax whose name is on the mortgage or deed and nothing of it goes to the LLC if its not in the LLC name? We also have 1 property that is in the LLC and titled to the llc. That properties taxes or tax write offs would go to the parners as outlined in the operating agreement correct? Thanks for the help
Again, thanks for the replies…I am not in a community property state.
However, this raises more questions.
Can the LLC, in this example, if taxed as an S-corp, claim depreciation for the rental(s)? I know that the flips are not depreciated. Can both business aspects (rentals and flips) exist tax efficiently within the same LLC or would it be better to establish separate LLC’s, one to hold the rentals and other longer term RE holdings, and another to manage the flips?
It seems obvious that I would not want to pay myself to manage the rentals to log that as a rental expense only to pay SE taxes on that income.
I am also assuming that if the S-corp pays reasonable salaries, further/excess profits from the flips can avoid SE taxes if taken as distributions…
dwj:
whoever owns it reports it on their 1040. rental = Sch E. flip = Sch C.
If the LLC owns it, it goes on the appropriate LLC tax form depending on how you chose to tax it. If you have more than one member, and you didn’t choose otherwise, the LLC will be taxed as a C-corp, thus profit % doesn’t matter (nothing passes through to your personal returns).
techhead:
depreciation? yes.
always best to seperate flips from rentals, but they definitely can operate in the same entity. You need to carefully document your intent with each property so that your capital properties don’t get classified as dealt when/if you sell them.
Right. keep the rental income passive, avoid the SE, and take a tax-free distribution of profits at the end.
Your understanding of S-corp (or LLC taxed as S-corp) salary vs. distributions and SE is correct.
Of course, if you’re doing both in the same entity, it messes up this plan.
So, we should only have a single member to keep it from being taxed as a C-Corp? What are the advantages of this arrangement as opposed to having say 4 members, myself, my 2 sons and my husband?
Mark, didn’t you really mean to say that the LLC with multiple members defaults to a partnership unless corp tax treatment has been elected?
my bad. thanks, Dave. I should learn not to answer these questions after 9pm on a Friday!
The default is always to a return taxed under personal tax laws (not corporate), which would be partnership.
Melissa: if you’re doing rentals, you probably want to choose partnership taxation, since this keeps the income passive (no SE tax). The income would pass through to each of your returns according to your respective income %.