Real Estate Property LLC and Tax Preparation

7 Replies

My first post, so please bear with me. I have a rental property in Texas. I set up a LLC last year but yet to deed the property to the LLC. I've set up a bank account for the LLC and started using the LLC bank account for expenses a few months ago. I have a few questions that I hope to get your help.

1. I still have mortgage under my name on this property, and the monthly payment is automatically deducted from my personal bank account. I learned from this forum that the mortgage might still remain under my name after I deed the property over to the LLC. I don't want to inform the bank to withdraw payment from the business account as they might find out and want me to pay the loan off. But if the payment is withdrawn from my personal account, that is considered co-mingling? How do you guys handle this?

2. How did you guys do the tax return for the first year you set up your LLC? As part of the year is rental property and part of the year is LLC. It looks messy to me...

Thanks again for all the generous advice and experience sharing in the forum. It helped me tremendously.

@Hongmei Zhang

The first thing to understand is the purpose of creating an LLC. The purpose for creating an LLC is for asset protection. However, the entity must act like an entity with assets held in the business's name.

This includes the following

  1. Having title in the LLC's name
  2. Bank account in the LLC's name
  3. Rent checks written out to the LLC's name
  4. etc

If you fail to do the above - you risk losing your personal assets in the case of a lawsuit.

To answer your question about paying through personal account and business account.
If you pay the bank through your personal bank account - you may want to reimburse your personal account through your business bank account.
Example - you make a $1000 mortgage payment on 2/1/2018 from your personal account. You make a transfer then from your business account to your personal account on 2/1/2018.

If the LLC is a single member LLC; it might not matter so much for tax purposes because it will be reported on your schedule E(if a rental property).

However, one thing to worry about is that Texas does have an LLC Gross receipts tax return.

Thanks a lot Basit. You made it very clear. I am transferring the title over soon. Thanks for the reminder on Texas tax. I have to learn how to deal with all these soon.

@Hongmei Zhang

In most cases, your LLC will be considered a "disregarded entity" for tax purposes. It means that it looks exactly the same on your tax return, with or without an LLC. And, in your specific case, before and after will be merged together. There is no mess or confusion on the tax return: the entire year is all in one place.

All the business practices that @Basit Siddiqi recommended serve a NON-tax purpose: legal protection. They are not required for taxes and not saving you anything (other than they would make an IRS audit relatively painless) - but they are essential for legal reasons. Of course, anything legal needs to be addressed by an attorney, and I'm not one. In short - yes, do as Basit advised.

The annual Texas Franchise report that he mentioned is nothing more than an annoying formality. Simple and free. No tax unless your gross receipts are over $1 mil.

@Michael Plaks Thanks! I just downloaded Form 1120S - guess I have to fill this out and then I will understand how the whole thing work. I will fill the Texas Franchise later. Thanks all for your help!

What county is your property located in? Do you have a Property Manager?

I am looking at Form 1022S now, only to find out that I will need to fill out schedule K-1 as well as 1099 for the contractors I used. Having a LLC does generate lots of extra work indeed!

@Ronald Rohde It is in Harris County. Yes, I already have a PM. Thanks.

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