Active and passive income in one Series LLC?

2 Replies

I've set up (well a lawyer) a series LLC to hold buy and holds. It wasn't cheap, but I believe it was money well spent. I understand the tax merits of holding buy and holds in their own child LLCs, with their own EIN. Taxes are a lot lower.

If one was to have passive (buy and holds) and active (flips and wholesaling) in the same child LLC with the same EIN, you could be taxed at a higher rate for all. No good.

My question is, what risks does one run from having one Series LLC, but keeping your active and passive income streams in separate child LLCs with different EINs?

My lawyer is advising against doing so, mainly for tax purposes.  I've reached out to my accountant for comment, however April 15 being 6 days away, I don't expect to hear from him super soon.

So thoughts?

@Pat Jackson

It generally is okay to do both active and passive activities within one entity. The entity should simply provide you a breakdown of what your passive and active income is.

However, one thing they do not advise on doing is having buy and hold and flips within the same entity. The reason for this is because the IRS can argue and can potentially come in and say that you are a dealer in real estate and all your sales are considered ordinary income subject to self-employment taxes. 

I don't have much experience with series LLC's but I would imagine if the child LLC's are treated as separate entities it wouldn't be an issue of doing flips in one and rentals in another.(just one opinion).

Basit Siddiqi, CPA
917-280-8544

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