Real Estate Investment with LLC?

[jhynesrockmtn]

I'm jumping back into the landlord business. Selling a property near Seattle and buying a "vintage" 6 unit building. Excellent neighborhood and rare in this are in that it was built originally in the early 1900's as a multi unit property. Spokane's older section is littered with mini mansions converted to apartment buildings.

I'm tempted to form an LLC to hold the property for liability reasons. I never considered this before when I owned single family homes. Has anyone done this? Just my wife and I as owners although if I pass, the ownership will transfer to my two kids and having the LLC pass should be easier.

The dogs approve. Inspection in a few hours.

[look 171]

Yep, I did, even when my accountant thinks its a waste of money. Not the single family though.

Built in 1900? Man, that's a lot of work. Has the building been updated. How do you guy do this up there with the utilities. When these mansions are divided up, did they install gas, elet. and water meter to each units individually?

Sorry for hijack.

[wdfifteen]

All of my real estate is owned by an LLC, which is owned by my trust. This is on the advice of both my financial advisor and my attorney. I don't know all the details, but the LLC provides some level of liability isolation of this asset from the rest of your assets. The trust is for the pass-through to heirs.

[McLovin]

I hold my real estate investments in LLCs.

It does provide liability protection. It has some other benefits, like keeping your ownership interest more private and some other things.

There's really no disadvantage to it, other than your state will likely charge a yearly fee for the LLC.

If the LLC is a single member or owned by spouses, it's a "disregarded entity" for tax purposes. In other words, you just pay your individual taxes as normal, having the LLC makes no difference on how you pay taxes (no disadvantage or advantage over holding the property in your name personally).

[jhynesrockmtn]

Built in 1900? Man, that's a lot of work. Has the building been updated. How do you guy do this up there with the utilities. When these mansions are divided up, did they install gas, elet. and water meter to each units individually?

Built in around 1912. I had it inspected today. This one is unique in that it was built originally as an apartment building, not single family. Most of these are converted large homes. This has updated electrical with a panel per unit plus one for the common areas. All knob and tube is gone, newish roof. It needs some TLC but mostly solid. Tenants pay their own electrical. The water/sewer/natural gas and garbage all landlord paid.

[HardDrive]

We have a single rental house, not in an LLC. You guys are making me worry. What would be the tax repercussions of setting up an LLC and transferring the house?

[look 171]

Originally Posted by HardDrive

We have a single rental house, not in an LLC. You guys are making me worry. What would be the tax repercussions of setting up an LLC and transferring the house?

Nothing. It cost a few bucks to set up, but that's it. Our state wants 800 bucks, then my accountant wants his share to set it up.

[dafischer]

Works well for us. My wife and I bought the building that now houses our tax and accounting practice under our LLC (we're partners), and the LLC rents the office to our practice (again partners). Plus we also have a residential rental in the building.

The rent was set based on rental comps for our area, and is neither too high nor too low. It effectively transfers some of our self employment income, which is taxed at a higher rate, into rental income, which is taxed at a much lower rate. Depreciation and operating expenses help further lower our tax liability.

[Eric Coffey]

Originally Posted by jhynesrockmtn

I'm tempted to form an LLC to hold the property for liability reasons. I never considered this before when I owned single family homes. Has anyone done this?

Yeah, it's basically compulsory these days for investment properties (or anything you own that carries risk). If you own several individual income properties, it's advisable to have each under it's own LLC as well. You can set-up a "parent" LLC to own them all as subsidiary LLCs, and even own that parent LLC under an S-corp. That can give you multiple layers of protection, anonymity, and "corporate veils".

There are all sorts of other tricks as well, such as corporate domiciling in Delaware, or even off-shore, etc. It just depends on how intricate you want/need to go, and how much money you are willing to spend to set up and maintain the entities.

However, there are different pros and cons with different scenarios, so best to talk to a pro first.

[wdfifteen]

Originally Posted by HardDrive

We have a single rental house, not in an LLC. You guys are making me worry. What would be the tax repercussions of setting up an LLC and transferring the house?

No tax repercussions. In Ohio it costs $85 to establish it, plus lawyer fees if you go that route. No annual renewal fees.

[KFC911]

Originally Posted by dafischer

Works well for us. My wife and I bought the building that now houses our tax and accounting practice under our LLC (we're partners), and the LLC rents the office to our practice (again partners). Plus we also have a residential rental in the building.

The rent was set based on rental comps for our area, and is neither too high nor too low. It effectively transfers some of our self employment income, which is taxed at a higher rate, into rental income, which is taxed at a much lower rate. Depreciation and operating expenses help further lower our tax liability.

Just curious as to how income earned under an LLC changes one's tax obligations...that has not been my experience.

Originally Posted by Eric Coffey

Yeah, it's basically compulsory these days for investment properties (or anything you own that carries risk). If you own several individual income properties, it's advisable to have each under it's own LLC as well. You can set-up a "parent" LLC to own them all as subsidiary LLCs, and even own that parent LLC under an S-corp. That can give you multiple layers of protection, anonymity, and "corporate veils".

There are all sorts of other tricks as well, such as corporate domiciling in Delaware, or even off-shore, etc. It just depends on how intricate you want/need to go, and how much money you are willing to spend to set up and maintain the entities.

However, there are different pros and cons with different scenarios, so best to talk to a pro first.

My first SFH rental was under an LLC, then I came to my senses as I acquired more, and came to the conclusion that all the layers in the world won't help if lawyers get involved. Many years ago, I transferred ownership back to myself, obtained adequate ins. (might need an umbrella policy too), so as to feel comfortable, and I'll let the ins. company's lawyers defend any potential claims against my properties. Hopefully I'll never find out whether I was stupid

[dad911]

Originally Posted by KC911

Just curious as to how income earned under an LLC changes one's tax obligations...that has not been my experience.
........

Same here. As I understand it, income from LLC passes through to owner(s)

[wdfifteen]

Originally Posted by KC911

Just curious as to how income earned under an LLC changes one's tax obligations...that has not been my experience.

I think he's changing income from "self employed" status to rental status. Self employed pays payroll tax (roughly 16% now). Rents and royalties do not.

[dafischer]

Originally Posted by wdfifteen

I think he's changing income from "self employed" status to rental status. Self employed pays payroll tax (roughly 16% now). Rents and royalties do not.

Correct, WD. The rent we pay for the office ($21,600 per year) comes off income on the practice Schedule C. The net income from the practice flows to our personal return via K-1's and is subject to self employment tax.
The rental income appears on the LLC Schedule E, and is further diluted by depreciation, property tax, repairs, maintenance, etc. This net income again flows to our personal return via K-1's, but is not subject to SE tax.

[McLovin]

Originally Posted by KC911

Just curious as to how income earned under an LLC changes one's tax obligations...that has not been my experience.

It depends on how many members the LLC has.

If there are multiple members, it does change the way you are taxed, and how you report, etc.

But if you (or you and your spouse) are the only members, it doesn't affect your tax obligations, the amount of taxes you pay, etc. one penny, if you elect to treat the LLC as a "disregarded entity."

Google LLC "disregarded entity" for lots of info.

[wdfifteen]

Originally Posted by dafischer

Correct, WD. The rent we pay for the office ($21,600 per year) comes off income on the practice Schedule C. The net income from the practice flows to our personal return via K-1's and is subject to self employment tax.
The rental income appears on the LLC Schedule E, and is further diluted by depreciation, property tax, repairs, maintenance, etc. This net income again flows to our personal return via K-1's, but is not subject to SE tax.

I do something similar with two of my LLCs. I could run them directly and pay SE tax on the profits, but instead I lease them to my C corp as franchises. The lease payments are not subject to SE tax. Since I run the C corp, I also still run the LLCs.

[CalPersFatCat]

If they sue the LLC, any equity in the property held by that LLC is in jeopardy. Leverage proponents will advocate refinancing and sucking the equity out for a down payment on a new property. And placing that new property in a new LLC. Rinse, repeat.

It's all part of the conspiracy to keep us all working until we die.

[chocolatelab]

Originally Posted by wdfifteen

No tax repercussions. In Ohio it costs $85 to establish it, plus lawyer fees if you go that route. No annual renewal fees.

800 in cali every year and 85 one time in ohio.

thats just crazy.

Im in the Cali boat and have all rentals in LLC then in the trust.

It makes me sleep better.

[MT930]

Simple LLC will give you liability protection.

Make sure any lease on the property is with the LLC itself.

Very standard practice with any target asset. Talk to your attorney.