Setting up a management S-corp for managing rental property owned by an LLC

Solo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 875 posts · 498 votes

Since you're only going to manage your own rentals the S-corp/LLC is likely overkill. Why not just set up sole prop? I doubt 10% of the GRM will equal enough to where an S filing status makes sense.

The home office and such is nominal so that alone isn’t worth doing this. Many people who own rentals and are already self managing them will set up a pm biz to be able to adopt a Solo 401k. Since the contributions have to come from the business income (PM biz) it's not likely you'll come close to taking advantage of the high contribution limits of a Solo 401k. It will allow you to roll existing retirement funds into the 401k (save Roth IRA) and self direct those funds.

You listed some of the benefits but you didn’t explain what you’re specifically trying to accomplish. Let’s hear from some of the CPA’s in the group like @Michael Plaks or @Ashish Acharya.

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Michael PlaksPro Member

Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes

1y

@Nick Am

You're making conclusions and, much worse, business plans from very limited and, in your case, completely wrong understanding.

Self-employment tax that you will pay on your property management income is not instead of ordinary income tax on rental income. It's in addition to this tax. So, by transferring income from a rental schedule E to a business schedule C you're creating a significant extra tax. You will owe more, not less, taxes.

Is it still worth it? Maybe, but not for tax savings. Maybe for a retirement contribution or for some other reason.

S-corp has no purpose at all in your case. Not going to give here a lecture on S-corps, but take my word: no benefits, only extra hassle and extra cost, such as preparing another tax return. As @Brett Synicky suggested, keep it simple, as a sole proprietorship.

You are also not considering that you will have to pay $800 per year and per LLC to your greedy state.

In short, get some professional advice instead of TikTok advice.

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Nick Am

OP

Member since 2025 · 13 posts · 2 votes

1y

@Michael Plaks

"Self-employment tax that you will pay on your property management income is not instead of ordinary income tax on rental income. It's in addition to this tax. So, by transferring income from a rental schedule E to a business schedule C you're creating a significant extra tax. You will owe more, not less, taxes."

--> The SE taxes are STRICTLY NOT in addition. The ordinary income tax on income passing through LLC-B applies on the income AFTER retirement contribution, home office deduction etc, which will make the income nearly zero and hence leaving only the SE taxes and NO income tax. The reason I would end up paying ordinary income tax on Sch-E is that I get NO other deduction whatsoever like I would get for LLC-B (S-corp).

--> I agree on the $800 LLC tax to CA. And agree on the extra paper work too.

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Michael PlaksPro Member

Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes

1y

Quote from @Nick Am:

@Michael Plaks

--> The SE taxes are STRICTLY NOT in addition.

Thank you for teaching me about taxes

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Nick Am

OP

Member since 2025 · 13 posts · 2 votes

1y

@Brett Synicky

Thanks for your response. Let me try and answer your comments. Might help others to help me better.

--> I am trying to setup a management company (LLC-B) and charge LLC-A management fees. This active income can help me fund my retirement as well as help me get reimbursement for home office and health care premium while lower my tax liability.

--> This is my plan. I have two properties which at 10% fee will be around $35K. If I leave this amount in Sch-E, I get taxed at ordinary income tax rate at Federal and State level, which along with my regular W2 income can be substantial. Assume for a moment its close to max tax bracket ie. nearly 49% (Federal + State), roughly $17K.

Now if I pass that income as management fees to S-corp, I pay $3.5K (SE tax) + $800 (LLC fee) + $1700 (CPA + bookkeeping) = $6K in total.

Against $35K income:

1) I take $23,500 W2 which 100% goes into Solo 401K --> No income tax

2) LLC-B contributes $5875 towards retirement --> tax deduction

3) Remaining $5625 is reimbursed to me as home office expense.

Where is the income tax of 49% here? How is this juice not worth the squeeze? $6K in taxes and expense vs $17K in Federal and State taxes.

What am I missing?

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Nick Am

OP

Member since 2025 · 13 posts · 2 votes

1y

@Michael Plaks: Really sorry if I offended you. That wasnt my intention. I am trying to bounce of ideas from you and learn from you.

Going back to my assumptions, what part did I miss? Why would I owe ordinary federal and state income tax on the S-corp income? Wouldnt the retirement contribution, home office deduction, and health care premium absorb the income? I am not able to see the point you are making.

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Brett SynickyPro Member

Solo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 875 posts · 498 votes

1y

Quote from @Nick Am:

@Brett Synicky

Answers and thoughts below in Bold

--> I am trying to setup a management company (LLC-B) and charge LLC-A management fees. This active income can help me fund my retirement as well as help me get reimbursement for home office and health care premium while lower my tax liability. Agreed but Sole Prop will accomplish this without all the hoops you're talking about.

--> This is my plan. I have two properties which at 10% fee will be around $35K. If I leave this amount in Sch-E, I get taxed at ordinary income tax rate at Federal and State level, which along with my regular W2 income can be substantial. Assume for a moment its close to max tax bracket ie. nearly 49% (Federal + State), roughly $17K. Can you swing REPS to offset? Will that help?

Now if I pass that income as management fees to S-corp, I pay $3.5K (SE tax) + $800 (LLC fee) + $1700 (CPA + bookkeeping) = $6K in total. Just don't see the S-Corp or another LLC having a place here..I've heard tax advisors say it takes around $70k min of self employment income for the break even point for S-Corp to make sense. That could be just federally, however...

Against $35K income:

1) I take $23,500 W2 which 100% goes into Solo 401K --> No income tax You have to account for taxes like FICA and Medicare so this will be closer to $25-$26k. If you adopt a solo 401k as a Sole Prop you won't have to run payroll and incur payroll taxes and you can still do $23,500 plus 20% of the profit as a profit sharing contribution. BTW you said you have a 9-5 so keep in mind you cannot double dip on the employee 401k contribution. If you're maxing that out at your 9-5 then you'll only be able to contribute profit sharing in the Solo 401k. If you're contributing less than the $23,500 then the difference can be put into the Solo 401k plus the profit sharing. Hope all that makes sense.

2) LLC-B contributes $5875 towards retirement --> tax deduction what type of contribution is this?

3) Remaining $5625 is reimbursed to me as home office expense.

Where is the income tax of 49% here? How is this juice not worth the squeeze? $6K in taxes and expense vs $17K in Federal and State taxes.

Ok so after all this, book a consultation with a tax advisor. DM me if you want a referral.

2 Reply

Todd Goedeke

Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes

1y

@Nick Am The benefits of having a Solo401k are huge. Especially as it relates to being able to rollover IRAs and old 401k money into a Solo401k.

Self employment allows you to contribute large amounts to Solo401k to reduce FICA taxes.

1 Reply

Katie Balatbat

CPA and Attorney · San Diego, attorney · Member since 2022 · 302 posts · 219 votes

1y

@Nick Am

You also may want to consider other matters besides taxes, such as state law requirements for management companies and serving as a property manager, especially with a tiered structure.

*This post does not create an attorney-client or CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

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Nick Am

OP

Member since 2025 · 13 posts · 2 votes

1y

Quote from @Katie Balatbat:

@Nick Am

You also may want to consider other matters besides taxes, such as state law requirements for management companies and serving as a property manager, especially with a tiered structure.

*This post does not create an attorney-client or CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

Thank you, Katie. I will keep that in mind too.

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Nick Am

OP

Member since 2025 · 13 posts · 2 votes

1y

Thank you Brett, mainly for properly reading my inquiry and genuinely trying to help me. I am grateful to you for the same.
I have booked an appointment with a tax advisor for now. But will also DM you to get your referrals.

To answer your questions:
1) I agree with your suggest of Sole Prop and I am open to that.
2) REPS is hard for me. Both me and my wife have full time jobs.
3) That $5875 is the 25% of contribution that S-corp can make towards employee retirement.
4) Thank you so much for improving my understanding on how 401K limits are calculated. You are spot on. As I max out my 401K with my 9-5 job, I CANNOT contribute to solo 401K as an employee. This is significant. I am grateful to you for sending me back to the white board.

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Brett SynickyPro Member

Solo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 875 posts · 498 votes

1y

@Nick Am

My pleasure.I’ll look for your message.

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Ashish AcharyaBusiness Member

CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes

1y

@Nick Am Setting up a management S-Corp (LLC-B) to manage properties owned by your LLC (LLC-A) can provide tax benefits like retirement contributions, payroll tax optimization, and deductible expenses (e.g., home office, health insurance). LLC-A deducts the 10% management fee, while LLC-B reports it as active income, subject to self-employment tax but eligible for tax-efficient salary and distribution strategies.

Ensure the setup has a clear business purpose, reasonable compensation, and documented management services to avoid IRS scrutiny. While adding compliance costs (filings, payroll), this structure is beneficial, especially for larger portfolios.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

[email protected]941-914-7779

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Nick Am

OP

Member since 2025 · 13 posts · 2 votes

1y

@Ashish Acharya: You hit the nail on its head !!

Yes business purpose of LLC-B is my underlying question here. My confusion is why a property management NOT a valid business purpose? Can you please help me understand better what potential concerns in your experience can potentially arise here?

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Pooja Gupta

Member since 2021 · 6 posts · 0 votes

1y

In similar situations @Nick Am, keep us updated on your findings.

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Sean O'KeefePro Member

CPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 871 votes

1y

Quote from @Nick Am:

I own a rental property through a single member LLC (say LLC-A) and I am in process of purchasing another property under the same LLC-A. Currently, I am self managing all the operations. LLC-A is a disregarded entity for tax purposes and I report the rental income/expense on Sch-E.

I want to setup a management S-corp (LLC-B) to look after the management of properties owned by LLC-A. For this I plan on charging 10% of rental income as management fees to LLC-A.

Some of the benefits of this vertical integration brought by LLC-B is:

(a) Ability to contribute to retirement plans (solo 401K, etc)

(b) home office deduction

(c) health insurance plan premium, among others.

Some of the issues I have clarified so far from this and other forums:

1. Is juice worth the squeeze? --> Definitely. If the management fees stay in Sch-E, it is exposed to ordinary income both at Federal and state level, which is way higher than SE taxes of 9.55% (15.75-6.2 (personal social tax already maxed out)).

2. Why make passive rental income active and pay self-employment? --> Passive income doesnt mean tax free income. It is in fact taxed at much higher rate as ordinary income.

3. Business justification of LLC-B --> This is can be a problem. However, I see this as a vertical integration and bringing more capabilities in house to make more money instead of hiring an outsider firm.

My question is such a setup valid? Has anyone done this without creating troubles with IRS? Can there be any issues due to business purpose of LLC-B? Want to hear opinion from the experts in the field here.

I'm also based in California.

S-Corps are generally for active income (think Flip, Real Estate Agrent) and
LLCs are generally for passive income (like rentals/STRs

[email protected]628-241-0888

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Setting up a management S-corp for managing rental property owned by an LLC

Setting up a management S-corp for managing rental property owned by an LLC

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