Questions I'm going to ask my CPA about my rental business

5 Replies

I own 3 SFR rentals and would like to continue growing. Currently they are not setup under a business entity, but I think it's time to get this done before buying Property #4. After completing Property #2, my CPA said a few things that now appear time to resolve. The big one was his statement that once I hit 4 properties I become a "professional landlord" and "things" change. I'm going to setup a meeting this week and I was hoping to get feedback on the question list I have come up with.

Thanks for any advice

Steve

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Is it time to use an LLC to protect the assets?

Would an appropriate structure be to have each house to be owned by its own LLC and then have an umbrella LLC own them all?

How would creating LLCs impact the houses’ mortgage, insurance, title, and tenant lease?

Would each house need its own bank account, security deposit account, and credit card in this setup?

  • IF YES: Should I terminate my existing business related accounts and create brand new accounts with new account numbers for each house to avoid confusion with the old accounts?
  • IF YES: I like using a CC to pay, but how would I get a line of credit on each property? My last credit score: 805, but would “the industry” really allow me a card for each house and my own personal card?

I was once advised here that owning a 4th rental property changes things and that I’d be considered a “professional landlord” at that point.What does this mean?

Does that professional landlord status occur if the homes are owned by LLCs and not me?


Forgot to mention one of the main reasons I want to do this:

Is a business structure the only and/or best way to get a loan that draws from the combined equity of the 3 houses?

Also I'm in Florida if that matters.

@Stephen Shelton I just came across this post and am curious what your CPA told you when you brought these questions to him. By "professional landlord changes things" did he mean that you would now be considered a real estate professional and therefore eligible to take advantage of real estate losses vs a non-real estate professional? I'm not familiar with using the term "professional landlord" in the context of driving tax strategy (just "real estate professional" vs "not a real estate professional", which is determined by hours involved, not scale).

Hi @Stephen Shelton ,

I know there is a lot of debate on this topic, but I think that as you acquire more properties (or assets in general) it is important to have an LLC. Insurance will do most of the job for you, but the insurance companies will always try to find a reason to say that an incident was not covered under the policy.

For federal tax purposes, single-member (single-owner) LLCs are disregarded entities. That means that they would not file their own federal tax return; the activity would continue to be reported on the LLC owner's tax return (in this case on your individual tax return). Florida also does not require a state tax filing for single-member LLCs. However, according to the Florida Department of State webstie, it does require each LLC to pay a $125 initial filing fee, plus an additional $138.75 annual fee (as part of the annual report you would have to file).

Therefore, I would recommend not creating more LLCs than necessary. It may be beneficial to create more than 1 LLC, but I would make sure that your reason for doing so is thought out in advance.

Each house would not needs its own bank account, etc. However, each LLC would.

"Professional landlord" is not a tax term, so I am not positive about what your CPA meant by that.

Originally posted by @Jana Cain :

@Stephen Shelton I just came across this post and am curious what your CPA told you when you brought these questions to him. By "professional landlord changes things" did he mean that you would now be considered a real estate professional and therefore eligible to take advantage of real estate losses vs a non-real estate professional? I'm not familiar with using the term "professional landlord" in the context of driving tax strategy (just "real estate professional" vs "not a real estate professional", which is determined by hours involved, not scale).

I think I misunderstood my accountant back then. I have another at the firm now and he had no idea what that could possibly be: the accountant that had told me this a few years ago was in his office meeting a client, so we couldn't ask. I ended up doing some phone tag with him to get some clarification, but honestly I forgot about it until reading your response.  Apparently it was nothing and I must have misunderstood him.

Originally posted by @Brian Schmelzlen :

Hi @Stephen Shelton,

I know there is a lot of debate on this topic, but I think that as you acquire more properties (or assets in general) it is important to have an LLC. Insurance will do most of the job for you, but the insurance companies will always try to find a reason to say that an incident was not covered under the policy.

For federal tax purposes, single-member (single-owner) LLCs are disregarded entities. That means that they would not file their own federal tax return; the activity would continue to be reported on the LLC owner's tax return (in this case on your individual tax return). Florida also does not require a state tax filing for single-member LLCs. However, according to the Florida Department of State webstie, it does require each LLC to pay a $125 initial filing fee, plus an additional $138.75 annual fee (as part of the annual report you would have to file).

Therefore, I would recommend not creating more LLCs than necessary. It may be beneficial to create more than 1 LLC, but I would make sure that your reason for doing so is thought out in advance.

Each house would not needs its own bank account, etc. However, each LLC would.

"Professional landlord" is not a tax term, so I am not positive about what your CPA meant by that.

I mentioned a single-LLC setup but he said that that would leave my houses just as vulnerable since they exist in the same corporate entity. He stated that with the costs of the LLC setups (especially the multi-LLC setup) that it would have it's own costs as you stated and extra costs with managing the accounting. He stated that an umbrella policy would be cheaper and easier... but it never occurred to me that the insurance company would find a way to wiggle out of it.

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