Real Estate Professional and LLC Taxation

General Real Estate Investing
1

Over the last two years, our part-time ventures in Real Estate are becoming such that it will become a full time business. We currently have a Partnership LLC for our rental properties and a Sub-S LLC for our quick turn properties.

My undersandings on the conversion to a Real Estate professional:

  1. By becomming REP, the $25k passive limit is removed.
  2. By becomming REP, rental income changes from passive to active.

So, if my understandings are correct, wouldnt we be better off changing the taxation of our Partnership LLC to another Sub-S LLC since the income is now active anyway?? I believe the rental properties would be treated the same either way (long-term gains) since they have been held > 1 year. We could then take a 60/40 split between salary and distribution and save some SE taxes. Any thoughts on this??

2

your understanding is correct.

3

It is my understanding that converting your rentals from passive to active also converts your sale profits from capital gain to ordinary income.

There is a question in my mind about whether the conversion is mandatory if you are already a real estate professional.

My understanding could be flawed, but certainly worth confirming with your own tax advisors.