Yes you can, but get with your accountant to make sure it makes sense from a tax perspective. You also would need to do it in a separate entity that isn't just straight pass through, or it wouldn't be any different from just taking the proceeds.
Why bother? If you "pay yourself" as a separate business, then you also have to withhold self-employment taxes and pay your share of social security and medicare tax. Just take money home via draws or paydays. What benefit are you trying to gain doing it this way? The only reason I can see is if your wife needs an earned income to qualify for something like a Roth IRA, but since you also talked about paying yourself I assume that's not your goal.
Anything you "write off" paying yourself/your wife will have to them be claimed as income....so generally it's a wash but just more paperwork and complexity.
Nice name and you spell it right too! The advantage I could see is additional write offs for another home office and various business costs. Just exploring possibilities.
@Erik Sherburne , yes, we "Eriks" need to stick together. Proud Viking/Norse heritage or whatever.... (wink)
As a sole proprietor or LLC, you are entitled by the law to claim a home office or any other expense as long as it is an ordinary and necessary business expense. There's no need to turn yourself into a property manager.
I am good friends with an IRS auditor. The test they use is, "Is this an ordinary and necessary business expense?" Smart phones? Yes, you take pictures, answer applicant emails, etc. Home office? Yes, if dedicated to that purpose (i.e. it can't be a guest bedroom or game room AND a home office). A week long trip to Hawaii for you and your spouse to "look at investment opportunities"....??? Mmmm....better have some awesome documentation to prove this was in fact ordinary and necessary vs. a vacation. I wouldn't recommend trying to claim personal expenses as business expenses, even though some "big name" hot shots (RDPD, Chapter 5) have tried to sell that snake oil to the gullible.
There's a lot of bad info out there, unfortunately. But you are okay to claim any legitimate expenses as long as you follow the law. The law does not require you to be a property manager to take advantage of deducting business expenses. I recommend finding an experienced local CPA who works with other real estate investors so you can get professional advice on these and other tax matters.
I've had a PM s-corp since 2003. At tax time I play what-if. In my agreements I have the right but not obligation to 7-8% of rents plus turn work, repairs, etc.
It usually helps me to funnel some SE income thru. Especially if I want to get a loan since I have no w-2. My wife and I can both qualify for loans individually, but only because we have k1 income on multiple levels.
I doubt you need more SE income, so it's a personal 'it depends'. My wife and I have so little 'income' after depreciation, we could qualify for free school lunches.
Anyway, this year, I was tax-advantaged to limit my PM income. I watched my refund drop dollar for dollar. We sold a couple houses last year so it's an anomaly where more 'expenses' per property were hurting me. Apparently a $94k gain when your 'poor' helps to have more passive income. Who knew?
Having a PM co gives you options. I chose s-corp for the retirement plans available, anonymity, ease of bookkeeping, tracking mileage, etc. It is generic sounding and wears many hats. Explore s-corps with your legal and tax pro!
I will assume that you own your properties in an LLC - If that's the case and you are the only owner, the IRS sees this as a "disregarded entity" for tax purposes. This basically means that the IRS sees you and the LLC as the same entity. Note that this is different than how courts see an LLC (which is why forming an LLC is more of an asset protection strategy than a tax strategy).
If you were to "pay yourself" in the sense of just taking a monthly distribution from your LLC's bank account into your personal bank account to compensate yourself for time spent, that generally would not cause a tax impact. This is because the single member LLC is a disregarded entity and the IRS just sees this transaction as you taking money from one bank account you own, and transferring it to another.
However, were you to run payroll and pay yourself through that, you would have to pay income tax, state and local taxes, and social security taxes. Obviously, this method is not recommended in most cases.
Be sure to talk with your CPA who knows all the details, as I may be missing something here.
Hope this helps!
Like many said before, if you pay yourself through a separate LLC, you would have to pay income tax, state and local taxes (if any), and social security taxes (which might be of interest if you want to accumulate the annual points towards SS...and of course, believe SS will be there to pay you at retirement any relevant amounts).
You can setup things such way to pay the least amount of taxes, for specific gain and interests. But you have to run the numbers specific to your situation and scenarios with an experienced CPA to see if you gain any advantage and when/how.
Depending on how much income you have, you can set up retirement plans (checkout Solo 401K) that would give you more (higher contribution limits and more flexibility) than regular job plans.
You can also set up medical reimbursement plans and pay for medical insurance that way, thus transforming personal expenses into business expenses. You can also hire your kids.
If you have a lot of rental losses: another reason might be to make it clear in your (or your wife) qualification as a real estate professional - although not dependent on a LLC as that is mostly a minimum 750 hours annually spent on real estate matters, if no other job - in which case you can deduct more then 25K in rental losses.
So, it all depends on your and your wife situation - if you have a job or not, with or without retirement plans and medical insurance, etc. - and what is more important to you.
There is another aspect to consider to set up as a different property management entity (LLC) from the holding entity - asset protection - you separate public facing affairs and all the interactions with tenants, contractors, etc. through this operations LLC and act as property manager, not owner. If properly done, is one half of common asset protection strategy.
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