what is the tax stand point if i had a home under the name of my llc and then got a equity loan on that property. Say i got an equity loan for $25,000. If I did this under my name this would be tax free income. If i were to pay my self this money from the llc it would be tax deductable and reported as income. Would I write a check from the llc to me and call it distribution of proffits.Just trying to understand this whole llc thing.
that is a great question.
what you’re asking is:
as an individual - you refinance a loan - that money is tax free, because it is not income per se. it’s loan money.
okay.
check it out.
LLC is a pass-through entity. on the books of the LLC, any refinance money is the same thing. it’s a loan, not income.
however, if you distribute it to yourself, i’m not sure what that would be considered. and if you “pay yourself a salary”, which is not advisable with LLC - then you’ve got to pay SS and medicare taxes, because you will be considered an employee of the company - this means, as the employer you must pay for the employees SS and medicare…i believe.
check with your CPA. they should have the answers. you can look up mcwagner as well - he usually nails this stuff down tight.
you’re confusing cashflow with income. they are not the same.
loan proceeds are not income, and have no impact on taxes. go to Jamaica. Have fun. send me a postcard. when you get back, you will have to repay the loan.
when you sell the property, THEN you have income basically as the diff between the sales price and purchase price (with some adjustments thrown in for fun)
TMCG. an LLC is not always a passthru entity. you can choose to tax it as a corporation if you wish. flexible taxation is one of the things I like most about LLC’s.
so mcwagner, wouldn’t you consider having an LLC taxed as a corporation for short-term investments? i.e. rehabs and sells
and LLC taxed as pass-through - for long-term? i.e. rentals
make the larger, “quicker” amounts with rehab projects, keeping that money in the company - thus not paying taxes on it and using it to make other purchases (and writing off such expenses), while paying yourself a salary - as required by corp.
and then for the long-term - as a pass-through, benefit from the overall continuous benefits of rental units.
or just have a Corp - perhaps C-Corp for short term
LLC for long term.
thoughts?
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Property is in LLC with a loan on it. Interest on the loan is NOT necessarily deductible. You need to prove that loan proceeds were used for business purposes & not personal expenses. To the extent that loan proceeds were not used for business purposes, you lose the interest deduction.
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Only S-Corporation is required to pay salary. With C-corporation, the opposite has traditionally been the case - IRS looked to recharacterize salary as dividends. Given the present low rate of taxation on dividends on dividends, that is probably not the case at present.
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Keeping proceeds of sales within C-corp does not mean no taxes. Rather, it avoids the second level of taxation (dividends are taxed to the shareholder receiving them). You still have taxation at the C-Corporation level. Contrary to guru hype, there are NOT many deductions that are unique to C-corporations. I covered the three that are far & away the most relevant in my teleconference. I have unwound many a C-Corporation b/c they are so often innappropriate for RE. Whether to use one is very fact specific.
John Hyre