I recently purchased my first investment property and as a newbie, I have a few questions. For years, I've been reading and learning on the BiggerPockets site, but it's amazing how much you don't know once you actually get started.
Here is some background info:
I am a 22-year-old recent college grad (as of December 2018). I currently live at home and am in the process of closing on a single-family home near a college campus near me that I plan to live in for a month or two and then rent out to students. I obtained a conventional primary residential mortgage and the purchase is in my name.
I also have an LLC, which currently isn't being used. I plan to make another property purchase within the next year, and I am looking for tax and legal advice on how to run and grow this business. I understand that many of you are not experts in these fields, however, sharing any stories or just giving me a sense of direction would be very helpful. Below are a few specific questions I have:
1. Should I open a business bank account for the rent I collect, or at this point should I just open a separate personal checking account? This would require an EIN...is it worth it if it's just me?
2. I was told by the mortgage broker that if I transfer the property to the LLC, it may make my personal financial position look less appealing and it may be harder to get a second loan. If this is the case, how do I legally protect myself and my assets?
3. How much do I have to make a year in rental profits to have to report it as income?
4. At this point, I really don't know what about taxes, especially business taxes, so any useful information helps.
1. As I understand it, your business does not own the rental property. You own it personally in your name. Therefore, the rent is going to come to you, personally...correct? If that's the case, then you do not need to open a business account, as the business will not be collecting any $$$. You do need to open a separate personal checking account, which will not require an EIN. If you've been a good personal banking customer already, then it should be pretty easy to simply open another checking account where you already bank.
Another option, however, is that you can have your LLC serve as your Property Management company. There are plenty of posts here on BiggerPockets that discuss the pros and cons of this strategy.
2. I'm not sure about how it would or would not effect your personal financial decision. Any profit/loss in your LLC would also be considered in your personal financial position. However, a transfer of the property to the LLC could trigger a due on sale clause with the Lender. You do not want that.
3 & 4. Best to talk to a CPA
Thanks Chris, this is very helpful. I will definitely look more into using the LLC as the property management company.
Do you know if I'd owe more in taxes if they were made through the LLC as opposed to personally, or would it be the same?
You can elect to have your LLC taxed as a C corp. (very bad) or an S Corp. The S corp election would have no benefits for rentals but could for flips and othet earned income.
So really by having an LLC and a business bank account, it's neither hurting me nor helping me?
wow! Great answers @Will Armstrong , have you read the book on Rental Investment by Brandon Turner? If not you may find your answer in that book.
@Michelle Campbell yes, I have, but it's been a while. I'll definitely pull it back off the bookshelf and review some topics. Thanks for the reminder that I have that!
Ok cool 😎
Having a separate business account for your rentals I feel is a good strategy.
You can have everything auto drafted out of the business account for the mortgage, as well as have all rental checks auto deposited into the account.
It also keeps the rental property funds separate from other income streams making it easier come tax time to look at income and expenses.
@Cory S. I agree, thanks! Are there any downsides you know of in regards to having a business account?
Not that I know of. It’s pretty much treated as a savings account. Check with your bank for more details.