So I created an llc for when I start flipping properties in the near future. I recently bought a rental property. I was thinking about putting the rental under my llc, but am not sure about the advantages and disadvantages of that? Does anyone know about this and would be willing to share their insights?
The following is from a previous post from mcwagner regarding taxation issues:
Remember, rental income is passive and not subject to self employment tax. income from flips is ordinary income and subject to self employment tax. capital gains from selling rental homes is capital gains to you personally.
The LLC is tax neutral so there’s no tax advantage to putting the property into the LLC. From everything I’ve read, it’s best to keep the rentals and flips separated since they’re taxed differently.
Why do you want to put the property into an LLC?
The problem with having both flips and rentals in one entity is that if “most” of your business is flipping, IRS could determine that the rental was “incidental” to your flipping business, and that rental income becomes ordinary business income, subject to SET.
Of course, this goes the other way, too. If you have a rental loss, then you may want the loss to be a business loss to lower SET on flipping income. Of course, most people don’t plan that a rental will be a loser…
you can have both flips and rentals in the same entity without incurring undesired SET, but you have to keep good records for each property you purchase to establish “intent” for that property.
So if you want to hold a rental in your LLC, you need to document that you intended to rent it from the start. Don’t advertise it for sale, but keep records that you advertised it for rent, tenant interviews, etc. There are no rules for establishing “intent” or “incidental,” so it comes down to facts and circumstances. and the more documentation you have the better your case.
Also note, that once you make it a Sch E rental, you cannot switch back to calling it “incidental” to the flipping buisness in order to take a rental loss to lower SET on flip income. That would probably draw some… uhm… “unwanted” attention.
I find that most people are most comfortable separating their business along “flip” and “rental” lines.
of course, this brings up an interesting problem:
you buy a house to flip, but cannot find a buyer, so you put in a tenant for a six month lease waiting for the market will improve.
so now you have a rental property in your flipping LLC.
uh-oh.
I am guessing the IRS will look at this as rental incidental to ownership, and, the owner’s intent to flip the property has not changed. Same as buying a rehab then using a lease option arrangement to flip it.
Is this a trick question?
what if you end up holding it for two years?
what if you purchase a property with the intent to rent, but end up flipping it (from the wrong entity)?
just sayin’…
If your intent to flip never changes, it does not matter how long you hold the property, it will still be dealer realty when it does sell.
Purchase with the intent to rent, market for rent, but get an offer to purchase you can’t refuse, the sale is still an investment sale.
I read somewhere that you can have problems handling your own evictions if the property is held in an LLC.
Some said they were able to do it others not. I guess it depends on the individual judges interpretation.
It might be something worth checking into before you make your decision.
Depends on the state. Here in MS, I can handle my own evictions and all our properties are in an LLC.
When you are part of an LLC, it will show that you are a serious investor. Your credibility as a business person is higher compared to others who are not part of LLCs.
In your opinion.
Lots of people operate successfully outside of LLC’s.
Asset protection, tax and legal issues trump “credibility” every time.
Anyone can represent themselves in court. When you appear as the owner/manager of your own business entity, you are not representing yourself, you are appearing on behalf of the business entity. If you are not an attorney, then you are engaged in the unlicensed practice of law.
If the opposing party objects to your appearance as the unlicensed practice of law, and the judge upholds the objection, you lose your case. If your LLC is a party to a lawsuit, make sure your LLC is properly represented by a licensed attorney.
For $50 it’s a no brainer. Put all rentals in there own LLC seperate from one another. Better to be safe than sorry.
Everything has a cost. Is all that “extra” protection worth the additional cost every year for tax returns? Or the bookkeeping hassle? Or would that cash be better spent on additional insurance and some in your pocket?
If you personally are managing the properties, and something creates liability, it is you personally who will be sued. Yes, also the LLC, but you are personally liable for your personal actions and no LLC will prevent that.
Second, many state courts have held that charging order protection is intended to insulate an LLC member from personal liability arising against another member, and thus that charging order protection does not apply to a single member LLC. So, until this gets resolved (either by courts or legislatures) it remains unclear what effect this would have on all the “other” LLC’s you own. Having properties one per LLC may offer no protection at all while you’ve incurred real cash costs, plus hassle costs, for maybe for nothing.
And finally, it is highly likely that either (A) the bank doesn’t know you have put mortgaged properties into an LLC or (B) you have had to sign a personal guarantee on the mortgage.
In the event of a lawsuit, scenario (A) will totally crash and burn your “LLC protection” strategy. Probably the bank will call the loan due or at a minimum force the title back into your personal name. Scenario (B) will only leave you on the hook for the balance of the mortgage after the judgement goes thru and the new property owner trashes the property supporting the mortgage YOU guaranteed.
Am I saying this is a bad strategy? Nope.
But don’t delude yourself into thinking that one simple $50 strategy will save your bacon from every possible risk.
I had read it was about $400 just to file the paperwork for an LLC… closer to $1,000 if you use a lawyer…
And isn’t there an annual fee?
Yes. Most, if not all, states have a LLC origination fee as well as an annual fee. It can be pretty reasonable to almost 1k per year for registration. You can search for a state by state list online…and I’ve posted one on here before too. Filing the Articles of Organization is easy and you only need to fill in the blanks for that. You need a lawyer for the Operating Agreement. The state doesn’t care about your OA, but you will if you ever get sued…
The main advantages to an LLC are: limited liability, which means that each shareholder or member is liable only up to the amount he invests; pass-through taxation. And it will obviously effect on your rental property. And it does have disadvantages including restrictive transfer of ownership. An LLC is often a good starting point for many small businesses. However, if a business owner plans to receive outside funding via venture capital or angel investors, other options should be considered as well.
limited liability, which means that each shareholder or member is liable only up to the amount he invests
Not true. An LLC will not magically insulate you from all liability.
You are always personally responsible for your personal actions when personally managing property.
Owning property with a mortgage in an LLC will probably also require a personal guarantee, which increases your liability far beyond what you’ve invested.
Just to name the two big ones…