Can I lower my tax burden through an LLC before I own a property?

9 Replies

Forgive me if I'm posting in the wrong place, but I'm stuck and I'm not sure where to turn. Any direction would be appreciated.

I'm certainly spending a lot of money, time, and miles on my car, but I don't own any property yet and may not be able to for a year or two. In the meantime, I've been thinking about arbitrage, or possibly renting out my car on that AIR BNB for cars thing BP keeps advertising.

I want to reduce my tax burden as much as possible in order to put that savings toward actually owning a property, so long as I can do it all legally.

I currently work in phone sales at my W-2 job, in Richmond, Virginia. It's not Real Estate related at all. However all of my free time I'm either learning, driving around or on the internet looking at deals, analyzing deals. I put a lot of time into this even though I don't have my first property yet. I'm waiting for Jan 1 to file for an LLC, get the Tax ID number, open a bank account in it's name to start building credit and to keep the business finances separate from my own.

Some of my questions are:

1.) Do I qualify as a "Real Estate professional" to the point I could deduct my business expenses losses against my W-2 income to lower my tax burden? If not, what would I have to do to legally qualify for that this year or next?

2.) Do I actually need to qualify as a "Real Estate Professional" to deduct losses from my business's first or second year from my W-2 income?

3.) Can I somehow write off many of the miles I've driven this year or next on my car? Every mile I drive, I'm listening to a podcast or checking out neighborhoods, etc..

4.) Should I just wait until Jan 1 to create the LLC and tax ID number, and bank account?

5.) After creating the LLC and the Business bank account. Is there a legitimate way to provide those who work in the business with me a cell phone, myself included? Or would I have to have 2 completely separate phone numbers on completely separate accounts if I choose to use my business line to make personal calls as well?

6.) Could/should my LLC own my car?

7.) Who do I need to talk to before I make a move, and what do I need? I assume I need a consultation with someone. But do I need a CPA, or a tax attorney, or do I need H&R Block or what? I'm okay with hiring a professional for professional services, I just don't want to spend money in the wrong places.

Can anyone out there point me in the right direction? I would be forever grateful!

It seems like you’re trying to build the roof before you build the foundation. 

Unless you plan to start with 5+ multifamily skip right past all your steps about an llc, a business account, business credit, etc.  If you have less than a few hundred thousand in net worth just buy in your name and get started. If you’re worth more than a million buy an umbrella policy. 

To become a real estate professional you would have to spend at least 750 hours per year if you quit your w-2. You’ll need to spend 1 hour more than your w-2 job on real estate if you don’t quit. You can write off some losses without become a professional based on your taxable income. 

You can still write off any real expenses like cell phones and mileage without the llc. 

Ps. I’m not a CPA, I just pay one so take this all with a grain of salt but it has worked for more for me. 

@Bill Brandt

Thank you for the reply!

You're right I don't have a lot of assets to protect. None actually. But Is there any benefit to NOT creating an LLC? Not for liability purposes but for several other reasons:

Establishing credit and a history of income for one.

I have a decent credit score, but no "useable income". My lender said even though I make more/ year "part time" than I did "full time" I only have a 6 months history "doing part time work" so we can't use that.

I could benefit from intro bonus offers for business bank accounts, phone service discounts, among other things, I'm sure.

Having a business checking/credit card would help keep expenses organized. I would be eligible for a Tax ID Number which would give me the ability to buy from manufacturers and resell online to raise money for Real Estate. (If this is even legal)

If I'm going to be spending money on books, Pro memberships, conventions, etc. why not have it go through an LLC building business credit?

I'm starting from scratch on the W2 side it looks like. But I've been selling on eBay and door dashing for years as a hobby.

Am I way off?

Can I literally do all of this as a person with a SSN?

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If you have business you’re conducting in your own name with income you’re declaring then you can deduct the necessary expenses to make that income. The llc might help you with buying and selling stuff but for the real estate portion I think you’re just adding complexity and costs. As far as the intro bank account bonuses. There are probably 10x more for you personally. I probably only do 4-5 a year but you could easily do a dozen if you have time. 

@Bill Brandt

Thanks again! Adding complexity and cost is something I'd like to avoid. There's enough of that already. Ill have to look for other more productive uses of my time and energy and come back to the LLC part later.

I should probably still talk to a CPA though about the tax strategies. I'm definitely spending more time on this then I spend on my normal job, especially if learning counts!

@Mike Rice

What Bill Brandt said about the hours to qualify as a REP. The IRS has clear definitions/guidelines if you qualify.

What about starting a side hustle? Something you are good at? Could be consulting, offering services, handyman, door dash, uber, etc.

You can get a business permit/license from your city and make your side hustle official. Permit/License fees from your city might be a lot cheaper than paying the annual state tax for a LLC.

Just remember, you are not in business until you make a sale. Keep track of any startup cost as those can be written off as well.

Not a CPA.

@Mike Rice Call up Bill Pilc CPA with Pilc & Moseley. That's who I use in the area and he's helped me a bunch with tax questions, even before I did my first deal. I know a few other investors use him as well.

@Mike Rice As far as I understand it, you can write-off startup expenses associated with the LLC you are forming. This can be things like education expenses. I would also wait till Jan 1 or later. I did something similar to what you're considering and then I had to pay for filing taxes early on. You also don't need to qualify to pass through the LLC's loses to your W-2 income. I worked with Prime Corporate Services. They hold consultation calls. Just be aware they are trying to sell you something at the end of the day. Hope this helps but feel free to DM me if you have questions.

*not a CPA or tax professional. 

@Wesley I.

I'm good at door dashing and I have an ebay seller account as a hobby too. I was under the impression I was in business the moment I started doing business related activities, purchases or sales, but it's good to know that may not be the case. I'll definitely have to keep track off all the start up costs. I'll have to get a CPA too it seems

I think I'll take the advice from @Tom Hacku and reach out to Bill / Pilc & Moseley.  And/ or @Ryan Arsenault suggesting Prime Corporate Services.

Thank you all!

@Mike Rice

Some of the costs that you mentioned may be eligible to be written off / capitalized at the time of purchase.

I.E. driving your vehicle to drive to locations to see properties.

Unfortunately, the miles driven aren't counted as a deduction at the moment since you are not considered to be in the business of real estate / rentals.