Taxes on Rental Income

9 Replies

Hi Everybody. Great news I closed on my first single family house. We hope to get the renovations started up next week. 

The question is I live in NY and the property is in Baltimore, for tax purposes is it better to open up the LLC for the rehab costs and future rental income in Baltimore or NY. We all have to pay taxes but we don't need to pay them twice or more then we have to. Any advice as to where I should open up the LLC.

Thanks to all in advance.

Coincidentally, I just went to an investor meetup this week and the topic was Tax Advantage Strategies and Entity Formation. They suggested setting up an LLC per property or project to keep things tidy and the IRS happy. They also recommended setting up the LLC in the same state as the property address.

Are you planning to rent it out or flip it?

Do you have a loan on the property? If conventional, an LLC may not be an option

Thanks for the input Nichole I am leaning towards that direction for the reasons you mentioned above. I spoke to my accountant and he suggested the same thing to keep things neat. My accountant says that the Baltimore taxes will count as a credit against my NY taxes and I will only pay the difference as we have higher taxes. 

My plan is to rent and refinance. Then I will go hunting for the next.

Kyle, right now the loan on the property is from a hard money lender. I am speaking with a bank to refinance the money out. He told me that putting the property under a LLC can cause the loan to be called but if it is just me on the LLC and the bill is being paid it should not be a problem.

Thanks for the advice everybody.

@Alexander Spira First of all putting a property in an LLC will have zero impact on your taxes.

Choosing to have the LLC taxed as a corporation, either C or S, could affect your taxes. Generally an electing to tax as an S corp has no advantage for rentals and a C corp is generally considered horrible way to own real estate. Talk to a competent CPA familiar with real estate to confirm and explain. If he or she does not know why I said what I said in the two sentences ago, you have the wrong CPA.

The reason for an LLC is generally liability protection, however this is not a cure all for liability by any means. An LLC will cost you money to maintain (an additional tax return, annual fees to the state etc.) If you do business in MD and in most states you will have to register your out of state LLC anyway. So save the hassle and cost and just open an LLC where you do business. A MD personal Property return (essentially an LLCs tax return) will cost you $300 a year.

Borrowing in an LLC will require a commercial loan. This can be harder to get but also likely to cost a little more and require larger down payments.

Given the disadvantages to an LLC, I still choose to title property in an LLC vs my own name. My guess is 99% of attorneys do the same for their own properties.

PS don't ask your accountant for legal advice and don't ask your attorney for accounting advice. 

I am not an attorney nor CPA the above is not to be considered legal or accounting advice for your specific situation, only  my laypersons understanding of the law.

It is generally advisable to have the LLC formed in the state where the LLC owns properties. You could form the LLC in NY, but then you would need to register in MD as a "foreign LLC", subjecting yourself to additional fees. Keep in mind each state statutes govern LLC's differently - so that is something you should take into consideration.

I just Bought a duplex on 11-16-2017 in stone mountain ga. i’m doing about 11k in renovation

to the rental property and i will be living on one side of the duplex, and i have a tenant living on the other side... can i write off all of the renovation

Congratulations on your new property @Reggie Jackson. I am no accountant but I believe that if the property is your primary living area you can not claim write off on your taxes. Ask your accountant anyways he or she will know for sure.

@Reggie Jackson

I recommend you re-post your question by clicking "start new discussion" at the top of the screen. You attached it to an old discussion, and you will get more attention if you start a new one and name it "Deducting renovations on a duplex" or something descriptive like this.

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