Can an LLC avoid the Real Estate Professional requirement?

Question

In a perfect world I would be able to deduct my real estate losses against my very high W2 income. However, achieving "Real Estate Professional" status is not something I will be able to do in the near future.

It has always been my understanding that an LLC setup does not have much of an impact on taxes, only on things like liability, privacy, etc. However, on a recent podcast I heard an accountant say that an LLC can pass-through losses to deduct against other income. Was this misinformation? Would establishing an LLC to hold properties be a method to get around the Real Estate Professional IRS requirement?

Steven Hamilton II · Answer

It WILL NOT allow it to offset ordinary income. That will depend upon how it is structured. And it all depends upon each deal. It is looked at on a transaction by transaction basis.

Dan Acampora · Answer

It has been my experience that the LLC pass-thru can be used to offset other income/loss however as was suggested to me a long time ago - if you are combining flips (that you take title to) and long-term hold properties, chances are the IRS will group all and consider you a "dealer" and will tag all properties as short-term capital gains or the highest tax rate they can. It is better to compartmentalize similar type deals or transactions into their respective corporations or LLC's so that each would be treated accordingly ...Please note: I am NOT an attorney or cpa, as always check with your preferred professional as it relates to your specific situation.

Steven Hamilton II · Answer

No it would not. You will still be subject to the passive activity loss rules AND you would still have to meet the RE Professional rules PLUS you would have to group all of the activities together.

Tom Spaeth · Answer

Not sure of the issue. My loses from Real estate currently pass though to my W2 income. Though I suppose there could be a limit. There is a distinction between active and passive investing. If you are passive in your real estate,  there are some restrictions about losses. Passive real estate losses can not be deducted against active W2 income, or any other active income. As best as I can recall. I am an active investor as I manage all of my real estate personally. If all you do is collect the rent money from the property manager, then you will probably be considered passive.

Wayne Brooks · Answer

My understanding is that the "pass through" is just that.....the losses pass through just as if the LLC didn't exist, so if the losses weren't deductible as an individual, the LLC pass through does nothing to change that.