How to Handle My Mobile Homes Rental Income?

Question

Hello everyone and thanks for any feedback. This year i bought and renovated a few mobile homes in FL under the same LLC and already rented them out. The income is coming in to the LLC's bank account. My questions are: How would I be taxed on this income? What deductions can I use? The money I used to renovate them and acquire them, was mostly from my own cash (no bank or personal checks to prove amounts), could I use this cash as an expense? Since the mobile homes depreciate, can I use the depreciation against the income? and what would be the best way to get the income out from the LLC?

I appreciate any guidance on this matter

Andrew S. · Answer

One reason for not having receipts is perhaps that the workers you paid do not wish to pay taxes on their income.  Please know that, by law, you are obligated to issue 1099Misc tax forms to each and every handyman/contractor you paid more than $600 to (in a given calendar year), UNLESS they are an incorporated business entity.

Janene Tompkins · Answer

First, disclaimer: this is not tax advice. Please seek out a CPA or EA for your individual tax situation.

Ok, now then. An LLC is a pass-through entity. Net income from the LLC passes through to your individual tax return. As for the cash you put into the LLC you could allocate it different ways, as a capital contribution or as a loan to the LLC. The expenses you incurred in getting your business started could be deducted against the business income. And yes, use that depreciation! This all goes on the LLC’s K-1. The net income or loss from the LLC’s K-1 is then reported on your individual return.  Don’t forget the new 199A deduction! Depending on several factors, mainly  do you meet the test to call yourself a “real estate professional”, you may be able to use the LLC losses to offset regular income. If you do not meet certain tests, the losses are deferred. There are multiple steps in this process, please hire a good tax advisor. Good luck!

Janene Tompkins · Answer

Hi Again,

The 199A deduction has nothing to do with having a real estate license. It is part of the 2017 Tax Act, and is the 20% profits deduction available to pass-thru entities. The “real estate” professional qualification allows the deduction of RE losses against ordinary income. It is a time and services test, no RE license needed. In fact, real estate sales does not necessarily qualify one for the deduction. Sorry, I meander. But 199A and “RE professional” are two separate tax items. As for the deduction for paying people in cash, it depends on what your tax advisor is comfortable defending should you be audited. Again, nothing I say here should be construed as tax or legal advice. Please seek out a good CPA or EA who works a lot with RE clients.

Janene Tompkins · Answer

I forgot to add. If you have kept good records about who you paid, when, what for, etc. that could be considered a receipt. It’s okay to pay cash if you keep good records.

Kurt Jones · Answer

Great job getting the ball rolling. In FL, the LLC laws are a little confusing depending on how you structured your LLC. Assuming you structured your LLC through SunBiz, it is likely in your own TIN/SSN. So the income itself is taxed as such. Best advice is to check with your accountant as well as an attorney. You want to be able to deduct all the expenses you truly took for the business but don't want to do something that would allow an unscrupulous attorney (redundant I know) to pierce the protections afforded you by putting the properties in the LLC.

Rachel H. · Answer

@Edward Salazar It's probably best to talk with an accountant, preferably one who has experience working with real estate investors, regarding these questions. Good luck!

Janene Tompkins · Answer

Excellent point @Andrew S. !

Thomas S. · Answer

Talk to your accountant first. Accountants and attorneys are not necessarily on the same page. Your accountant should be your go to guy.

Edward Salazar · Answer

Appreciate the Detailed answer @Janene Tompkins, it was very insightful. Quick question regarding the repairs; they were also paid in cash to handymen and most of the materials were bought through them too and paid in cash as well, Would I be able to deduct these expenses even if I don't have invoices, receipts or contracts? I have a Ledger of every penny going out.

Regarding the 199A, I have an Inactive real estate licence and have purchased a few vacant lots and warehouse buildings in the past 2 years, I am going to research the deduction to see if I qualify. Again, thanks a lot for the awesome response

Edward Salazar · Answer

Thanks @Kurt Jones for the response. The company was set up as an S corporation and I will follow the advice of talking to an attorney

How to Handle My Mobile Homes Rental Income?

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