No income for our LLC, taxes?

Question

I have a newbie question regarding income for an LLC. If a property grosses a 100k, nets 50k after expenses, and then capitalizes the other 50k in improvements to the property, what is the income that is taxed? 100k? 50k? 0?

Chris Soignier · Answer

$50K in that period.    The $50K of improvements would be depreciated over a number of years.

Logan Allec · Answer

It doesn't matter if your LLC is paying you or not.  You will still have to pay tax on the 100k less the 50k less depreciation on your depreciable assets, such as the building and the 50k of improvements.

Unless elected to be treated as a corporation, an LLC is a flow-through entity.  Its tax attributes, such as income, flow through to its owners regardless of cash distributions.

Bryan Wilhelm · Answer

thanks.

Bryan Wilhelm · Answer

@Dave Toelkes,

I think I may have been misunderstood. I am not trying to limit my personal tax exposure. We are buying a multifamily, and reinvesting all proceeds into the property. We are not taking any income on it for ourselves for a few years. So, our LLC that buys the property is not paying us, but rather taking all NOI and putting into Capital improvements and expenses. For instance, we want to build new covered parking, fix units, etc. I was looking for a really general idea on how we can legally classify all the NOI we are putting back into the property so as to limit the tax liability of the LLC. I will be working with an accountant, obviously, but just wanted a general idea.

James Miller · Answer

You're likely going to owe taxes on the $50k less whatever depreciation you can claim. Some capex can be taken right away instead of year to year depending on category, but you'll have to ask your CPA about those categories. (you're probably not going to get anyone to give you that answer on here as it'd be too easy to make a mistake).

Remember, when it comes to tax strategies: pigs get fat, hogs get slaughtered.

Dave Toelkes · Answer

Your depreciation expense does limit your tax exposure to some extent.  Buy more rental property to get a larger depreciation expense deduction.  Depreciation is a phantom expense that does not cost you any money to lower your tax bill.

That said, most seasoned rental property investors don't buy a rental property, they buy the cashflow that the rental property generates.  These investors are not looking to minimize their taxes, but instead, they are looking for ways to increase their cashflow.

I personally can not wait for the day when my income tax bill goes over $1 million.  Just means that my taxable income was more than double that.

Bryan Wilhelm · Answer

@mike pena,

Let me state it this way: You buy a multifamily. It nets $50k after the normal, recurring expenses such as utilities, wages, etc. You take all of the net and put it back into the property, new covered parking, fixing units, etc. Your main focus is to limit your tax exposure, not worry about showing a great income. How would you accomplish this?

Mike Pena · Answer

The answer to your question is somewhere between 50k and 0.  It depends on the depreciation of the 50k that was capitalized. This is assuming you don't have some additional depreciation from assets/improvements in prior years.

Isaac Reitberger · Answer

The depreciation on the original cost and on the improvements is an expense also, so you'd have taxable income of 50k less the depreciation.

Dave Toelkes · Answer

You had $50K in net income.  You just capitalized it in improvements to the property.

No income for our LLC, taxes?

Most Popular Reply