I do not currently own any property. I am thinking about purchasing property to rent out. One of my main conerns is taxation. I have done some research on the issue and I understand that there are a few basic write offs rental property:
Mortgage Interest
HAO fees(I intend to purchase Condos)
Depreciation
Property taxes
Insurance
Maintanence costs
Advertising costs
One that I have not seen on any lists is Mortgage PRINCIPAL. I am assuming I cannot write off the principal of my loan as an expense. Is it possible for an LLC to write off Mortgage principal as a cost of doing business? Can an LLC write off the costs of purchasing the property in the first place?
To be clear I will give an example:
I start an LLC. I purchase a condo for 100,000 dollars. I put 20,000 dollars down. I collect 12,000 rent for the year @ 1,000 per month. HOA fees, mortgage Principal, mortgage interest, insurance, property taxes and maintenance equal out to 10,000 for the year. Is it possible for me to report a loss of 18,000 dollars for the year against my normal income?
Expenses: 20,000 down payment and 10,000 expenses.
Revenue: 12,000.
Profit: 12,000 - 30,000 = - 18,000.
My income for they ear is 40,000. I would then be able to report an income of 22,000.
Is this possible? Sorry if it is wildy inaccurate. I am a novice. Thanks ahead of time for the help/
LLCs are tax neutral. Despite what any guru or gimmicky crap tells you, having an LLC does not gain you a tax advantage. When you establish the LLC, you have to elect how it is taxed (as a sole proprietorship, partnership, etc). Any income or losses from the LLC’s business dealings will flow thru to your personal tax return. My wife and I have an LLC to hold rental properties. Our LLC is taxed as a partnership with each of us having a 50% stake in the company. The LLC tax data goes on an IRS form 1065 which is then included as part of our normal 1040 tax return when sent to the IRS.
You cannot deduct mortgage principal paydown…only the interest. The paydown will be realized later (hopefully in a positive way) when you sell the property. Certain fees associated with purchasing the property can be deducted.
But to be clear…the LLC does not give you a tax advantage. It may give you some liability protection depend on how you operate the business, but it’s best to just operate your business ethically, keep your properties in good shape, and carry the maximum amount of liability insurance your company will allow.
Thank you very much for responding. I really appreciate it.
To be clear. Is there anyway to write off the down payment made on a rental property as an expense for your business within an LLC?
For instance, if your LLC purchases another rental home can you deduct the down payment?
No. Not for the down payment. I guess look at this like you couldn’t get a deduction for your personal residence debt pay down. That money should be recaptured later if you sell for your purchase price plus additional money to cover your closing costs.
You can deduct normal expenses associated with your rental houses. These are things like utilities you pay, property taxes, printer paper and ink for leases, mileage expenses for all REI related issues, etc. So you deduct everything you legally can to lower your taxable income. Down payments and monthly principal payments just can’t be deducted.
I am also in the process of appying to form a single member LLC, just to protect my only rental property that I have.
When I purchased the property, it was done on my name, what legal procedure, forms or whatever…I need to do to move that property to the LLC?
I have a rental agreement/contract with my tenant, between me and the tenant…what can I do now to have a rental contract between the LLC and the tenant? can I just ask my tenant to sign a new contract and ask her to begin writing checks payable to the LLC instead of me without breaking any legal laws?
Thank you for your help
I’m not a lawyer…just an investor. That being said, here’s what I would say about your situation.
If you owe money on the property, you would need to talk to the bank and tell them you want to form a LLC and shift the property over to it. I’d read up on single member LLCs. Doesn’t sound like much protection there at all. May not be worth your trouble. If you still wanted the LLC, you’d have to file the Articles of Organization and pay the fees with your state to establish it. You’ll also want to get an EIN (employer identification number…kinda like getting your LLC a social security number) for it too. Then you should set up a separate bank account for the LLC. After the LLC is established, you could (with the bank’s permission) work on shifting the property over to the LLC. Once the LLC owns it (and you’re the manager of the LLC), then you could go to your tenant and have them make all future checks payable to the LLC.
Thanks for the quick reply
Woww…“Doesn’t sound like much protection there at all. May not be worth your trouble” really? I thought that LLC were the way to go to protect personal assets just in case tenants want to sue…now I am more confuse as of what type of entity offers the better protection for our assets. I have only one rental property that I am still paying for and my house, but still I would like those assets to have protection… :help
I defenitely agree with you on your statement that “keep your properties in good shape, and carry the maximum amount of liability insurance your company will allow”
Thanks
When I first started out, I thought the exact same thing. LLC means limited liability company…why wouldn’t I be perfectly protected if I had an LLC I wondered… You can be, but it basically means you can’t do any repair work yourself because if you screwed something up and it became dangerous it would be you personally liable. You would give the lawyer suing you an avenue to “pierce the corporate veil” of the LLC and go directly after your personal assets to remedy the situation. So now what? If you hire everything out and the person you hire has insurance, that should cover the problems.
Getting sued is one of the big fears for wannabe landlords. So are the “my toilet is clogged” phone calls at 3am. I get it. The reality is that I’ve ALWAYS been on the right side of any situation going to court. I’ve been the one suing for eviction and monetary judgments. I’ve not had anyone sue me for a slip and fall or any other frivolous lawsuit.
I do some of my own repair work and don’t really worry about that particular aspect of risk. Most tenants screw up more things by being tenants than my wife and I do by being landlords.
You already see what I do for protection. If anyone was to claim I was a slumlord and try to sue me, I’ve got literally dozens of examples of other properties in good shape.
It’s sort of the same concern about getting so many properties where you couldn’t afford the payments on all of them at one time if everyone moved out. I had that same fear before too. Now my experience shows me I may have five or six vacancies at one time, but there are still several dozen more properties to handle the financial load.
Remember protection doesn’t always come from pieces of paper. It can be how you run your business that makes the difference.
Thank you sir for the great information. It is really helpful.
Some states charge annual fees and taxes that can diminish the economic advantage of choosing to become an LLC. Among LLC advantages: pass-through taxation – meaning the profits and losses “pass through” the business to the individuals owning the business who report this information on their own personal tax returns. The result can be paying less in taxes, since profits are not taxed at both the business level and the personal level. Another plus: Owners aren’t usually responsible for the company’s debts and liabilities.
California, for instance, charges an annual $800 LLC tax along with a $900 to $11,760 annual fee based on a business’s total annual income exceeding $250,000.
excerpt from: http://guides.wsj.com/small-business/starting-a-business/how-to-start-an-llc/