Do I need an LLC to file tax deductions on real estate expenses?

8 Replies

Hi BP folks, I am looking for some professional advices for tax deductions on real estate investing. Right now I am hiring my father as a handy man, so in order for me to deduct those expenses do I need to have an LLC and a spearate account for handling those transactions?

You do not @Johnny Szeto. You can deduct those expenses using Schedule E of the form 1040.

Best of Luck on your Real Estate Investing! 

@Johnny Szeto no you do not need to create a LLC to deduct the expenses for your rental. As Paul mentioned, you or your tax professional would enter your rental income and expenses on the Schedule E. I would recommend googling IRS Schedule E form. it will give yoy an idea of how you can categorize your expenses.

A single member LLC is treated as transparent or disregarded under Federal income tax law. Therefore it does not alter any of the income tax consequences of your activity in any way.

@Johnny Szeto 

Although you do not need an LLC in order to deduct expenses for repairs, it is certainly recommended to open a separate bank account for all transactions related to your real estate investment activity.

The tax form used to capture your activity will depend on the type of activity (rentals vs flips, etc).

Hi Johnny. That's a great question with a very simple answer. Unfortunately, I am not licensed to practice law in your state. I would recommend taking this as an opportunity to start a relationship with a real estate attorney or business attorney you can trust and rely on for future advice. Their answer to this question should not take very long at all. Alternatively, you could reach out to a tax professional. Though this question does not require such action, you can always reach out to the IRS for an opinion.

I am not an accountant or an attorney. And you should definitely check with one as to how best to set your accounting up on your properties. You need to know what your options are on depreciating your rental units (you can depreciate your rentals faster if you want using accelerated depreciation but you have to make that decision at the very beginning of when you start your accounting on the properties - you cant switch later).

That being said, I would suggest that no, you do not need to be an LLC to writeoff expenses for your rentals. Assuming you own them under your own name, your accounting should be the same thing - the only difference being they are going to be reported directly on your return as opposed to doing a return for an llc and then having the bottom line number (i.e. profit or loss) flow through to your personal return.

You can write off depreciation, mortgage interest, property taxes, repairs, etc. And then offset the rents against those expenses. Your depreciation should help offset most if not all your income depending on what type of cash flow and leverage you have on the house. So your rental income may be completely tax free even.

Johnny, definitely use a separate bank account for your income and expenses and use some sort of software to track your transactions. This will help at tax time. 

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