Multiple real estate income streams in LLC

12 Replies

I just finished last year's taxes and have a large passive loss (after depreciation) on my rentals. But being a passive investor with large W2 income, I cannot benefit from the tax loss (at least thats what my accountant says). My question is: If I put the properties in an LLC along with other investments (tax liens, private lending etc), then could I offset gains on those investments with the passive losses on the rentals? Again, they would all run through the same LLC.

Unless I have misunderstood your situation, your loss within the LLC will be passed through and listed on your 1040, so the loss will decrease your income dollar for dollar.

Unless I have misunderstood your situation, your loss within the LLC will be passed through and listed on your 1040, so the loss will decrease your income dollar for dollar.

A common misconception, @Darron Stewart  but true only under limited circumstances.  You must have AGI below $150K and only get the full deduction if your AGI is under $100K or if you're a "real estate professional".  These "tax benefits" are often hyped by sellers of crummy rentals, but in reality are much more limited than touted.

@Anish Tolia an LLC has no effect on taxes at all. Unless you elect special tax treatment LLCs are totally ignored for taxes.

The good news is that you can carry forward these losses.  The other half of the story "tax benefit" hypers leave out is the benefit of depreciation is only temporary.  As you take  depreciation (or are allowed to take, if you don't) your basis decreases.  When you sell, the gains are increased.  Further, the amount of gain up to the depreciation taken (or allowed, if that's greater) is subject to a recapture tax.  You can use these carryforward losses to offset some of the gain on a sale.  Doesn't even have to be the same property.  If you own, say, 10 and all are generating disallowed passive losses and you sell one, you can use all the disallowed losses to offset the gains on the sale of that one.

You probably want to find an accountant who's knowledgeable about real estate.  This is a complicated subject.  

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Originally posted by @ANISH TOLIA:

I just finished last year's taxes and have a large passive loss (after depreciation) on my rentals. But being a passive investor with large W2 income, I cannot benefit from the tax loss (at least thats what my accountant says). My question is: If I put the properties in an LLC along with other investments (tax liens, private lending etc), then could I offset gains on those investments with the passive losses on the rentals? Again, they would all run through the same LLC.

 Anish,

The IRS divides up income into three buckets: ordinary, passive, portfolio.

Your W-2 income is considered ordinary.

Your rental loss is considered passive loss.

Any interest, dividends, or capital gains are considered portfolio. 

The passive loss rules would only permit you to deduct passive losses against sources of passive income. Thus, interest from private lending and capital gains from selling stocks would not offset passive losses. Your only hope to deduct these passive losses from rentals would be any of the following scenarios: 

-Have your spouse qualify as a real estate portfolio. As a result, this would transform your rental real estate activity into ordinary form, thus foregoing the passive loss restrictions and would allow these losses to offset your ordinary income. 

-Acquire more rentals that generate passive income. This would allow for a dollar for dollar offset with passive losses.

-Liquidate your rentals. Liquidating rentals will free up any unused passive losses directly attributable to that rental property. Planning strategy: selling a rental on owner financing / land contract / contract for deed qualifies as a liquidating. Thus, this is a way to still retain a cash-flowing property without completely giving it away. The suspended losses related to that property would be immediately deductible. 

There are other strategies. I would recommend you consider working with an accountant that specializes in real estate if you are determined to find creative ways to deduct these losses.

@Jon Holdman  You are correct. My AGI preludes offsetting income. My accountant did tell me about carryover losses. I guess I can use that to offset gains when I sell the property.

@Nathaniel Busch  Thanks for your input. My strategy will be to sell the rentals with owner financing  but not until the mortgages are paid off or at least the balance is less than the down payment I could get from the new buyer.

@Jon Holdman   You have said: 

"If you own, say, 10 and all are generating disallowed passive losses and you sell one, you can use all the disallowed losses to offset the gains on the sale of that one."

Do all 10 properties need to be under same title or LLC or it doesn't matter?

Originally posted by @Nathaniel Busch :
-Have your spouse qualify as a real estate portfolio. As a result, this would transform your rental real estate activity into ordinary form, thus foregoing the passive loss restrictions and would allow these losses to offset your ordinary income. 

 

What does this mean? Qualify as a real estate portfolio? Did you mean qualify as a real estate professional? Is there a reason Anish couldn't do that himself? Perhaps I'm missing some other information here.

@Gautam Venkatesan thanks for the clarification. I was actually listening to the tax tips podcast after I posted that, and learned exactly what you just confirmed. Is it 750 hours, or do you have to show that it's your primary profession? i.e. You spend as much or more time  of real-estate activities as your primary profession?

Originally posted by @Christian U. :

@Gautam Venkatesan thanks for the clarification. I was actually listening to the tax tips podcast after I posted that, and learned exactly what you just confirmed. Is it 750 hours, or do you have to show that it's your primary profession? i.e. You spend as much or more time  of real-estate activities as your primary profession?

I believe you are correct in that it has to be your primary profession but with a minimum 750 hours in that activity. Hopefully a CPA can confirm as I am not an expert in interpreting IRS rules.

Can you "Sub S" an LLC? If that works for you, bingo, you have a "small business" and can deduct everything legal?

Note: I am not a lawyer, but I play one on TV.

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