How to avoid personal income tax on rented 2nd home

Tax, SDIRAs & Cost Segregation
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How to avoid personal income tax on rented 2nd home

Michael Creamer
Member since 2022 · 3 posts · 1 vote

I have a house that I have a mortgage on and it is listed in my name and I'm looking to find out information about how I can achieve better tax benefits for things like avoiding income tax for collecting rent and how I can write off expenses for the house. Is there a way to do this while the house is still under my name like maybe forming an LLC and having the tenants pay rent to the LLC?

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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
4y
Quote from @Michael Creamer:

I have a house that I have a mortgage on and it is listed in my name and I'm looking to find out information about how I can achieve better tax benefits for things like avoiding income tax for collecting rent and how I can write off expenses for the house. Is there a way to do this while the house is still under my name like maybe forming an LLC and having the tenants pay rent to the LLC?

All legitimate business expenses are deducted from gross revenues to arrive at net income.  You don’t need another entity for that, with a few exceptions having to do with retirement plans.  Tax rates have been adjusted, but may be somewhat unequal between corporations and sch c reporting individuals. 

Personal expenses do not become “write offs” because you’ve created a business entity.  This is a common misconception.  However, it appears some people are much more willing to claim personal expenses as business expenses if they have a business entity rather than a sch c sole proprietorship.  Like Leona Helmsley, who paid $965,000 to have her house remodeled and charged it off as a corporate expense.  Her conViction for tax fraud led her to spend some years in prison while in her 70s.  Not the way I’d want to spend my “golden years”.  

Here’s the bottom line; Business owners write off expenses because they HAVE business expenses.  Employees don’t write off business expenses because they DO NOT have business expenses.  Yes, many people (1) misclassify personal expenses as business expenses and or (2) do not report all their income on their tax returns.  This is much easier for a business owner, or active investor than a employee, obviously.  This is also a personal decision, covering numerous different question or morality, ethics, responsibility, risk, etc that should not be considered here.  

A CPA with a real estate specialization can best advice you on how to arrange your affairs to LEGALLY minimize the taxes you’ll pay.  Improved real property has a natural tax advantage aspect because of depreciation.  But because of recapture, capital gains tax differential as to ordinary income, ordinary income, earned income, investment income differences, retirement funding, 1031 exchange deferrals, 401k deferrals, etc. the world of tax minimization become VERY COMPLEX.  You’ll only find a lot of confusion and even accurate advice may not be good for your individual needs on a forum.  See a tax professional.  
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  • Randall AlanPro Member
    Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
    4y
    Quote from @Michael Creamer:

    I have a house that I have a mortgage on and it is listed in my name and I'm looking to find out information about how I can achieve better tax benefits for things like avoiding income tax for collecting rent and how I can write off expenses for the house. Is there a way to do this while the house is still under my name like maybe forming an LLC and having the tenants pay rent to the LLC?

    The LLC would be owned by you, presumably - and if a single owner LLC would be incorporated into your personal tax return usually.  So no advantage from that directly.  BUT, by having a corporate structure you are able to write off a lot of personal expenses through the company.  A company pays taxes on the money left over after expenses.  

    If you use your car for business purposes (driving to / maintaining your property), the business part of that is a business expense.  Your cell phone- business expense.  Auto insurance- business expense, gas for the car - business expense.  Obviously repairs and maintenance - business expenses, etc, etc.  So charging off those expenses lowers the profit of the LLC and effectively lowers your taxes.

    hope it helps! 

    randy 

    0Reply
  • Todd Rasmussen
    Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
    4y

    @Michael Creamer

    You can write off expenses for rental property as a sole proprietor and should be filing IRS schedule E. The net of having a business entity usually is additional costs and not savings. If you have an exigent circumstance you should talk to a CPA before making any moves.

    0Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    4y
    Quote from @Michael Creamer:

    I have a house that I have a mortgage on and it is listed in my name and I'm looking to find out information about how I can achieve better tax benefits for things like avoiding income tax for collecting rent and how I can write off expenses for the house. Is there a way to do this while the house is still under my name like maybe forming an LLC and having the tenants pay rent to the LLC?

    All legitimate business expenses are deducted from gross revenues to arrive at net income.  You don’t need another entity for that, with a few exceptions having to do with retirement plans.  Tax rates have been adjusted, but may be somewhat unequal between corporations and sch c reporting individuals. 

    Personal expenses do not become “write offs” because you’ve created a business entity.  This is a common misconception.  However, it appears some people are much more willing to claim personal expenses as business expenses if they have a business entity rather than a sch c sole proprietorship.  Like Leona Helmsley, who paid $965,000 to have her house remodeled and charged it off as a corporate expense.  Her conViction for tax fraud led her to spend some years in prison while in her 70s.  Not the way I’d want to spend my “golden years”.  

    Here’s the bottom line; Business owners write off expenses because they HAVE business expenses.  Employees don’t write off business expenses because they DO NOT have business expenses.  Yes, many people (1) misclassify personal expenses as business expenses and or (2) do not report all their income on their tax returns.  This is much easier for a business owner, or active investor than a employee, obviously.  This is also a personal decision, covering numerous different question or morality, ethics, responsibility, risk, etc that should not be considered here.  

    A CPA with a real estate specialization can best advice you on how to arrange your affairs to LEGALLY minimize the taxes you’ll pay.  Improved real property has a natural tax advantage aspect because of depreciation.  But because of recapture, capital gains tax differential as to ordinary income, ordinary income, earned income, investment income differences, retirement funding, 1031 exchange deferrals, 401k deferrals, etc. the world of tax minimization become VERY COMPLEX.  You’ll only find a lot of confusion and even accurate advice may not be good for your individual needs on a forum.  See a tax professional.  
    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    3Reply
  • Colleen F.Pro Member
    Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
    4y

    @Michael Creamer Yes, your name or LLC doesn't matter the expenses count against income You also need to account for if the house is a second home in the sense that you use it as well as rent it. Then your deductions are proportional to the amount of time rented. Read the IRS publication on business expenses it can give you an idea of what to count against your income. Do you use this home part time?

    1Reply
  • Allan C.
    Rental Property Investor · Member since 2018 · 826 posts · 810 votes
    4y

    @Michael Creamer depreciation can go a long way to offset your rental income. How much additional income are you looking to shield after netting interest, opex and depreciation?

    1Reply
  • Fulton Abraham Sanchez
    Accountant · CPA Miami, FL · Member since 2022 · 192 posts · 43 votes
    4y

    Hi @Michael Creamer, there are very competent, real estate friendly CPAs who work with clients remotely and are familiar with LLC creations. Reach out to one that is a better fit.

    1Reply
  • Michael Creamer
    OP
    Member since 2022 · 3 posts · 1 vote
    4y

    Thank you so much

    0Reply
  • Michael Creamer
    OP
    Member since 2022 · 3 posts · 1 vote
    4y

    Thank you so much

    0Reply
  • Account Closed
    Investor · Odessa, FL · Member since 2021 · 52 posts · 29 votes
    4y
    (for us older folk... I'm remembering a Steve Martin bit... "How to make a million dollars and not pay taxes... ;)
    0Reply
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