Does putting rental property in LLC help with lowered taxes?

8 Replies

Getting conflicting information on this subject. Both husband & wife on W2 income w/ one rental property.

Does creating a LLC help with a lowered tax rate for the rental income? Very sparse information on this subject.

I appreciate any response/guidance on this subject.

Amit

PS - CPA says rules are "still evolving" but generally recommends LLC formation to maximize chance of lowered tax rate.

More specifically:

Do you think that the Schedule E, as a stand alone, qualifies for the 20% discount on taxable income as provided under the tax reform act passed in December of 2017? Or to qualify for this discount the Schedule E taxable income must come from a passthrough (i.e. LLC K-1)?

No, an LLC has no effect on taxes. The 20% deduction is on qualified business income, and has nothing to do with who owns the investment.
(267) 520-0454

The question is whether passive rental properties qualify for 199A treatment under the new law. Treasury has not issued any specific authoritative guidance specifically saying yes or no, but the balance of what we have seen so far from the professional community is that they likely will qualify.

Whether you hold it in your name or in an LLC makes no difference for purposes of 199A.

Guys - huge thanks for the prompt response. Very helpful.

Wow this thread went all over the place...

No an LLC doesn't do any thing

Yes the 20% pass through applies to schedule C, E, and F

Yes it applies to your rental on Schedule E

No it doesn't need to be in a business

There are income limitations on the 20% as well as limitations limitations regarding service companies.

In a rare case of disagreement with @Natalie Kolodij , one of her statements is debatable, at a minimum:

"No it doesn't need to be in a business"

unless she meant "does not need to be in a separate business entity" - then we're on the same page.

The statutory language in the new law specifically refers to "trade or business" as a condition for the 20% deduction. As @Christopher Smith noted, there's no definition or clarity attached. Most tax pros expect (but it is just an educated guess at this point) this language to refer to the lousy Section 162 definition. In simple terms, you would need to be personally involved. 

Simply owning a rental and reporting it on Schedule E does NOT automatically qualify it as a "trade or business" and consequently does NOT open it to 20% deduction. Some will qualify, and some will not.

And, as correctly pointed out by others, LLC does not change anything. It could be a minor factor in a debate whether it qualifies as a "trade or business" - but a minor one.

Also, before going much farther down this road: the 20% deduction is on NET income, after all deductions and depreciation. If your Schedule E shows a negative net, which is common for mortgaged properties, then there is nothing to discuss. 20% of zero is zero.

Originally posted by @Michael Plaks :

In a rare case of disagreement with @Natalie Kolodij, one of her statements is debatable, at a minimum:

"No it doesn't need to be in a business"

unless she meant "does not need to be in a separate business entity" - then we're on the same page.

The statutory language in the new law specifically refers to "trade or business" as a condition for the 20% deduction. As @Christopher Smith noted, there's no definition or clarity attached. Most tax pros expect (but it is just an educated guess at this point) this language to refer to the lousy Section 162 definition. In simple terms, you would need to be personally involved. 

Simply owning a rental and reporting it on Schedule E does NOT automatically qualify it as a "trade or business" and consequently does NOT open it to 20% deduction. Some will qualify, and some will not.

And, as correctly pointed out by others, LLC does not change anything. It could be a minor factor in a debate whether it qualifies as a "trade or business" - but a minor one.

Also, before going much farther down this road: the 20% deduction is on NET income, after all deductions and depreciation. If your Schedule E shows a negative net, which is common for mortgaged properties, then there is nothing to discuss. 20% of zero is zero.

I just meant that he doesn't need to set up an LLC, Corp, Partnership ect to hold it in.

Sorry- Rushed responses this time of year

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