Can you pass through rental income loss using an LLC?

Question

Hi,

I'm in the process of closing on a MFH and am getting mixed advice from two CPAs (one of them is my current CPA). At this time we are going to take title as individuals as one of the units with be owner-occupied by my sister. Our lawyer has said a LLC will be overkill for this situation and will have additional overhead. The bank has said that they would charge a higher rate for an entity on title. Based on the advice on taxes though, we could change our decision

Appreciate the help.

Out of the two opinions below, which one is correct?

• Current CPA says you can form an LLC and take any losses as a K1 loss on your personal taxes. I've not found anywhere on the internet where for eg a $50K loss on the property can be taken as K1 loss on personal income.
• New CPA said you cannot take rental losses and pass them through to personal taxes even if you do an LLC.

Account Closed · Answer

https://www.irs.gov/publications/p527/ch03.html#en_US_2015_publink1000219118

Skip down to the section "Limits on Rental Losses". Then go down to the "Exception for Rental Real Estate With Active Participation" and read some of the examples to see if any of those apply.

Dave Toelkes · Answer

@Pratik Jhaveri

An LLC that is NOT treated as a C-corp is considered a pass-through entity. As a pass-through entiry, the LLC does not pay any income tax in its own right, but instead, the LLC income/loss is passed through to the taxpayer's personal 1040. Your current CPA is correct that K1 loss can be taken on personal income tax return. Additionally, the $25K net passive loss allowance is available for LLC members with active participation in the rental operation (not the same as an active income business).

New CPA is apparently not real estate savvy or believes that the "C" in LLC stands for corporation. Pass-through LLC losses from residential rental activity where there is no active participation can not use the net passive loss allowance. As long as the LLC member(s) are active participants in the rental operation, up to $25K in pass-through losses can be used to offset other ordinary income on the personal 1040 (subject to MAGI limits).

Stephen Chittenden · Answer

In general, the character of the income is retained through the LLC. So, passive real estate losses reported on a K-1 remain subject to the passive loss limitations.

Basit Siddiqi · Answer

Having an LLC does not change the characteristic of the income.

If the activity inside the LLC is a rental property, the income / loss will flow to the members / partners as rental income / loss in which case, it would be deemed passive.

The member may be considered active participation in which case, there may be an exception to take up to $25,000 of losses.

Account Closed · Answer

My W2 is higher than 200k and I own 2 rental properties " one paid off and one with mortgage and I just found out that I can't claim all real estate loss if it I exceeds 25k and my cpa suggest me to put one of my properties into LLC so I can claim 100% of my real estate loss.
but my question is do I have to switch the deed to llc or I can just open an LLC under my name?

Account Closed · Answer

I’m in a similar situation

Pratik Jhaveri · Answer

@Wayne Brooks I thought all rental income is considered a passive income? What's an active income in REI? Or are you saying that if the LLC is formed for "active business purposes" then those losses can be carried through. Yes, that makes sense (in the past I've had a consulting business LLC where I passed through the loss).

I'm just trying to understand if there is any situation where a passive loss (from rental property) can be used to offset personal (w2 or other) income. Based on my understanding, all you can do is carry-forward the loss till you dispose off the property.

Wayne Brooks · Answer

I think the confusion is between active business losses which can be deducted verses passive investment losses, which I believe must be carried forward, beyond a certain limit anyway.

Can you pass through rental income loss using an LLC?

Can you pass through rental income loss using an LLC?

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