Claiming Depreciation in LLC vs. Personally Owned

8 Replies

My most recent tax filing made me more aware than ever of the potential benefits of claiming depreciation.  I've since sold that single family rental and have a contract on another in my area, near Denham Springs, Louisiana. 

Before I have an attorney draft the LLC, I'd like to know if there are any added difficulties in claiming depreciation if the property is owned by an LLC rather than personally held. I've started reading Landlording On Autopilot by Mike Butler and he discussed earned income (LLC) vs. passive income and the tax implications of both.  My hazard policy includes substantial liability coverage, so I'm wondering if I'll be causing myself more trouble than it's worth by transferring ownership to an LLC.  Logic suggests that transferring ownership to another entity would prevent me from realizing any personal tax benefits.  Any tax-filing advice from those more experienced than me would be much appreciated.

There are countless threads here of LLC vs. umbrella policy so I'm not really looking to debate that.

Can I claim the depreciation of a property held in an LLC? Also, I'm just looking for advice; any formal consulting will come from my tax/legal professional.

Best, -Robert

@Robert Lockwood there is no effect on your ability to take the depreciation deduction in an LLC. The default form of LLC in LA is a "pass through entity" and all of the taxation and tax benefits pass through the LLC to you personally. The property will go on your schedule E, just like any property that you own in your own name. The liabilities of the LLC remain with the LLC (when operated properly) and that is where the asset protection benefit comes from. As I understand it, that is the best option for buy and hold real estate investments in LA.

The second option is to elect taxation as an S Corp at the time of formation of the LLC. That gets a bit more complicated and is best suited for "trading" real estate (wholesales or flipping). While that wasn't part of your question, it's just something to be aware of. If you want to do some of that type of "trading," ask your tax advisor about the difference in how it would be taxed.

@Robert Leonard

Thanks a ton. I've often heard an LLC used for real estate described as a "pass through LLC" but never had it explained that clearly. It sounds like that will fit nicely with my investment model.

You can write off rentals in your name - write offs are not exclusive to LLCs.  Do you have a CPA?

@Michael Roy I do not have a CPA. I've been claiming depreciation on the property I just sold which was personally owned, but I'm revising my investing strategy to hopefully be more profitable while accepting less risk. I'm basically improving all the things I didn't like about my last investment. The LLC and the much improved liability insurance built into my hazard policy will cover the risk mitigation aspect.

I would consider a CPA, as I have found mine invaluable. I have an LLC for a non real estate related business l, but you have given me some things to think about with my own strategy. Thank you for that!

That LLC would be a DISREGARDED ENTITY. That means it is reported on the appropriate form on your tax return (Schedule E). Just because you have an LLC does not mean it is now earned income. It only becomes active income once you qualify as a real estate professional. Which is well beyond the scope of this discussion.

Keep in Mind you NEVER want to hold real estate in a corporation.

Originally posted by @Steven Hamilton II :

Keep in Mind you NEVER want to hold real estate in a corporation.

Sincere question: Why? And are you disagreeing with @Robert Leonard when he says an S Corp can make sense for shortly held properties?

Where you don't receive depreciation benefits is when you hold in an IRA.

Dark little secret. I will do active income activities inside an IRA like flip, wholesale or lend, but not hold. Ask a tax pro before you do anything. Cheers!

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