Real LLC Tax example

8 Replies

Hi everyone,

I am trying to understand this whole tax situation with a LLC and how we actually get taxed.

Say I have a property, under my personal name, that generates $1,000 per month on rents and $800 per month on all expenses combined. My annual cash flow would be $2,400 but I wouldn't pay a nickel in taxes due to depreciation and this will show up as a paper loss in my income tax.

Say if I held the exact same property under a LLC. To make the comparison easier, let's assume I have a 50% ownership in a multi-member LLC and the LLC has two of the properties noted above. So I would have $2,400 in actual cash flow (my portion) but the income statement will show a loss.

Question 1: I heard LLC owners pay taxes on their distribution. My portion of the distribution will be $2,400 but LLC had a loss in P&L. Do I pay taxes on this $2,400 or no?, If I do pay taxes, do I pay taxes based on the table below? or based on something else? (this is personal income tax table)

Taxable IncomeTax Rate
$0—$18,55010%
$18,551—$75,300$1,855 plus 15% of the amount over $18,550
$75,301—$151,900$10,367.50 plus 25% of the amount over $75,300
$151,901—$231,450$29,517.50 plus 28% of the amount over $151,900
$231,451—$413,350$51,791.50 plus 33% of the amount over $231,450
$413,351—$466,950$111,818.50 plus 35% of the amount over $413,350
$466,951 or more$130,578.50 plus 39.6% of the amount over $466,950

Look forward to hearing from you and thanks in advance.

A multi member LLC is a pass through- the income flows through and is taxed on your 1040 the same as if it was just in your name.

Assuming both partners are both active in the partnership there shouldn't be difference. The Partnership its self doesn't pay any taxes.

You pay tax on your distributive share of the LLC's income or loss, as a multi member LLC is taxed under the partnership provisions of the US tax code. The taxable income or loss will be reported to you and all of the partners ever year on a Form K-1 which gets filed with the partnership return. As already noted the LLC itself pays no tax, it merely files the partnership tax return (Form 1065) to report its activities for the year.

You don't pay tax on any distributions of cash UNLESS those distributions exceed your tax basis in your LLC interest (which you will need to have calculated at least annually).

@Andrew Namkoong I really need some light shed on this as well because I am going to start to purchase buy and holds and want to know what I should do as far as taxes go and such. Is it beneficial to form an LLC for the property? What if there is 2 people involved? What if the Equity splits are different at given time? Is it possible to take out a commercial loan under your own name anyways?

@Natalie Kolodij  

NOT A TAX ADVISOR... Not advising you, just speaking from personal experience

If you do a lot of real estate investing under your LLC, where its a fulltime business and get to the point where there's adequate regular income, you may want to consult with a CPA about the option of electing to have your LLC taxed as an S Corp and take a regular salary and any additional distributions as dividends. This election can save you tens of thousands on taxes.

@Andrew Namkoong the CPAs will need to clarify, but I am pretty sure you pay taxes on PROFITS not distributions.

You can profit without taking a distribution, and you will still be taxed.

You can take a distribution without making a profit, but this is simply consuming your investable capital.

What say the CPAs?

Originally posted by @Andrew Namkoong :

Question 1: I heard LLC owners pay taxes on their distribution.

Variations on this question are frequently posted, demonstrating how confusing the topic is.

Bottom line - forming an LLC does not change your tax situation unless you elect to have it taxed as a corporation - which YOU (Andrew Namkoong) probably won't.

Whatever INCOME your real estate investments produce will pass through to your individual income tax return, and it will be added to your other sources of income and taxed per the table you provided (ASSUMING you are married and filing jointly - since you provided the federal tax table for married filing jointly.)

I recommend getting the BP Tax Book discussed in the thread pinned at the top of this forum. It has tons of great information and may help clarify some of these complex topics.

Best of Luck with Your Real Estate Investments!

Thanks everyone for the input. 

@Mateusz Prawdzik

Answers to your questions - 

1. Is it beneficial to form an LLC? Putting a property under an LLC gives you protection on your personal assets, only if you treat your LLC like a business and not mingle your personal expenses through. There are podcasts done with Amanda Han that can help you more on this.

2. What if there are 2 people involved? & What if the Equity splits are different? I don't know exact answers to these but I am guessing this would be hard to achieve with conventional loans. I think creating multi-member LLC is the way to go for these situations. You can always create another LLC to purchase a different asset that might have different equity split.

My situation is that I am buying some properties in cash since I am not able to get commercial loan because I don't have enough 'experience'. I am trying to do a cash out refi few months after with a commercial loan under my LLC.

3. Is it possible to take out a commercial loan under your own name? I think you can and at least for the first few, you could be able to put the title under your LLC but still personally liable for the loan. Once you pass a certain point and become an experienced investor to banks - then you would be able to put both title and loans under an LLC.

Originally posted by @Jeff Filali :

NOT A TAX ADVISOR... Not advising you, just speaking from personal experience

If you do a lot of real estate investing under your LLC, where its a fulltime business and get to the point where there's adequate regular income, you may want to consult with a CPA about the option of electing to have your LLC taxed as an S Corp and take a regular salary and any additional distributions as dividends. This election can save you tens of thousands on taxes.

 Jeff this would only be advisable if he's doing flipping or wholesaling. 

You almost NEVER want to hold rentals in any type of a corp.