Avoiding self-employment taxes on LLC rental income

[Mike Percy]

Hello Bigger Pockets community,

I am looking into the possibility of investing out-of-state in a buy-and-hold rental property for passive rental income. I am considering a structure of holding the title in a land trust with a single-owner LLC as the beneficiary (see Clint Coons on YouTube for the various benefits of this structure, i.e. here and here). Because it's out-of-state, the LLC would need to hire a property manager to take care of leasing, collecting rents, daily issues, etc.

Because I am outsourcing the property management aspect, would this still be considered active income and therefore subject to self-employment taxes or is it possible to classify the income as passive and therefore not subject to those taxes? Would rehabbing the property before renting it out affect active / passive? What if the LLC paid a contractor to do that as well?

Unfortunately, I've read that it may not be possible to avoid this tax if the income flows through an LLC to a member of the LLC (see Forbes). Self-employment taxes are around 15% which has a big effect on cash flow so I'd like to avoid paying them while retaining the liability protections of an LLC if possible.

When trying to research this specific question, I found a couple of really hand-wavy forum posts from people who mentioned setting up multiple entities (LLC for the property and a C- or S-Corp for the property management) to minimize self-employment taxes on rental income. After many attempts to search on this site and on Google I haven't been able to find a definitive answer on how exactly that works, whether it's necessary, and whether it could also be done with a single LLC in the way I'm describing (outsourcing).

I know I will probably need to double-check with an estate attorney and a CPA / EA but I'd love to get some early insights from you knowledgeable folks before I go barking up the wrong tree.

Thanks in advance for any advice or links to definitive information on this topic. And good luck with your investments.

Mike

[Linda Weygant]

Buy and hold properties are considered passive income and are not subject to Self Employment tax regardless of whether you have a property manager in place.