Property Management LLC for tax benefits?

Question

Because I cannot take advantage of active deductions related to my real estate rentals, I am wondering if I can pay myself as the "administrator" or property manager of these properties?  The IRS believes you can't actively manage rentals with a W2 job, however, I have been for many years.  Is it time to start paying myself for all of this work and taking my business related deductions?

Basit Siddiqi · Answer

@Jill E.If you start paying yourself from the rentals, you may have additional income which will be reportable while the rentals will have another deduction it can't write off.You are talking about possibly payroll returns that need to be filed which add additional costs/time.You now may have to file a schedule C for the property management business which also adds additional costs/time.

Eamonn McElroy · Answer

@Jill E.

"the last personally referred CPA we had ended upon federal prison and every single client landed in an IRS audit.  I had the auditor tell me there was "no way" I could  manage my rentals (which I do) with a W2 job."

I think what probably happened is that the CPA was (incorrectly and unethically) coding your rental losses as non-passive, even though you have a full-time W-2 job and are not a real estate professional.  You were audited and the field auditor disallowed these losses and adjusted your return.  This is not the same thing as "The IRS believes you can't actively manage rentals with a W2 job".

You can have a full time job and still qualify for 'active participation' on your rentals and possibly use some of the passive losses to offset your W-2 income if your MAGI is below certain thresholds.

"What I was asking about was a management/administration company.  If I owned such a business why couldn't I be my own client?"

First you need to know if it will work.  SMLLC management company owned by you taxed as a disregarded entity manages rentals wholly owned by you in a SMLLC or directly?

No.  You're just moving money from one pocket to another for federal income tax purposes.

Second, you need to know if it's a good idea from a tax perspective.  For this you'll need to engage a CPA or an EA to examine your facts, circumstances and goals.

You seem determined to bypass the passive activity loss rules under Sec 469 by using "form" to overrule "substance".  And what's more concerning, you don't think you need a tax advisor to do it...

Jill E. · Answer

@Eamonn McElroy - the last personally referred CPA we had ended upon federal prison and every single client landed in an IRS audit.  I had the auditor tell me there was "no way" I could  manage my rentals (which I do) with a W2 job.  Obviously I disagree, since I have done it for years and take care of every single aspect of the administration.  What I was asking about was a management/administration company.  If I owned such a business why couldn't I be my own client?

Michael Plaks · Answer

@Jill E.

First, it is not that you "cannot take advantage of" your rental losses. You cannot take them now, due to your high W2 income, I assume. But you can take them eventually, when you sell the property. These losses are not discarded, they are postponed.

Second, you seem to be looking for a way to restructure your passive losses from rentals into active business losses. Your premise is correct, as business losses are always allowed, regardless of W2 income.

However, you cannot really accomplish this via a management company. If you implement this plan, it requires creating a management company that consistently loses money. Such setup does not pass a smell test as far as "for profit" operation and will collapse if audited.

If there was an easy way to convert suspended passive losses into deductible non-passive losses, we all would've been doing it by now. Alas, it ain't possible, save for some special circumstances.

Matt Ward · Answer

@Jill E. Are you implying you want to take some of the passive income you have from rentals that is not subject to SE tax and turn it in to ordinary income??

Eamonn McElroy · Answer

@Jill E.

"The IRS believes you can't actively manage rentals with a W2 job"

I think you're trying to convey something else or mean something else by this statement...there is no code section, treasury reg, rev proc, revenue ruling, or official statement that says this...

"Is it time to start paying myself for all of this work and taking my business related deductions?"

What does your tax advisor, who knows all of your facts, circumstances, and goals have to say?