How to LLC and another LLC

Question

Have LLC for buying and renting homes want to set up separate business to manage, do repairs  for LLC and want to do the work myself in that business. Can Joe Doe LLC (owned by Joe Doe) hire Joe Doe property management co. to do the repairs and manage when Joe Doe owns and does the work for Joe Doe property management co.?

Steve Smith · Answer

Thanks really helps understand.

If the management LLC has more deductions then income and has a loss, would this offset the  self-employment?

Linda Weygant · Answer

Your accountant is correct.  You can't deduct the same expense in two different places.  For example, you can't deduct the same telephone expense in both the management company and the rental company.

Here's the way you might consider setting this up:

LLC #1 = Buy and Hold LLC

LLC #1 = Managers LLC

Buy and Hold LLC purchases a property and pays to fix up the property.  All of the depreciation for the building and the remodeling goes here.  This entity also declares the rental income and all of the expenses such as mortgage interest, property tax, repairs and maintenance, etc.  This entity also pays a management fee to Managers LLC and deducts that fee too.

Managers LLC declares the management fee income that Buy and Hold LLC pays it.  It also takes business management deductions such as Office Supplies, Mileage, Telephone, etc.

This set up is fine, but there are two pitfalls.

#1 - In many states and municipalities, you may not manage other people's properties without a real estate license.  In this scenario you've created separate entities.  Even though you may own both entities, there may be a legal issue with an entity that does not own the property managing that property and not having a real estate license.  Check with a VERY knowledgeable local attorney on this.  I am not one, so I have no idea where this topic will fall.

#2 - You are effectively converting passive income to earned income.  Passive income is not subject to Self Employment Tax.  Earned Income is.  There are very good reasons for wanting to do this, but just know that this is the case.  You've increased your tax liability and you should have a very good reason for doing this (ie, you can now contribute to a solo401k!).  If your overall income is pushing the passive activity loss limitations threshhold, you could also put yourself into a scenario where that management fee is causing a passive loss that you are not able to take in the year the loss incurs.

So it's a tricky scenario and one that you should not do haphazardly or lightly without knowing the implications of what you're doing.

Steve Smith · Answer

My accountant is telling me that if I have a LLC that buys and rents property and Im the owner of that llc, that I can not have a separate company (that i own and do the work) manage the properties, and take depreciation, equipment, materials etc. in both companys. Accountant is saying that for the IRS the deductions, equipment, materials should be on the LLC side and not the management side, cant deduct both places.?? Not real sure what the accountant is saying?

Rebecca G. · Answer

Hey steve

I have a similar setup but on a much larger scale here. One company buys, renovates and sells. One company manages and does maintenance. One company is for buy and hold properties. To my knowledge, and my accountants advice, we create accounts payable and receivable from one company to another whenever we have to co-mingle.