Personal Use of Investment Property with MMLLC

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Personal Use of Investment Property with MMLLC

Marc Villiaer
Member since 2019 · 3 posts · 1 vote

I was hoping I might be able to get some thoughts from the community around a potential real estate investment I’m considering making. Here is the general scenario:

  • Establishing a multi-member LLC in which my spouse and I will be the members. The LLC will be taxed as a partnership and will not be considered as a disregarded entity for IRS purposes.
  • The asset we are purchasing will be a condo in Colorado (we live in CA). The LLC will purchase the real estate asset and we have a lender that will be providing the loan (we are personally guaranteeing).
  • We intend the property to generate rental income as well as capital appreciation over time. We will rent out to third-parties and will also utilize the property around our vacations (with the intent to pay market rent to the LLC).
  • We would expect the property to generate a tax loss (largely as a result of depreciation expenses). We have sufficient passive income in which to utilize the passive losses that are generated by this real estate investment.
  • I’m already capped on interest rate deductibility and property taxes as a result of my primary residence.

Questions:

  • Since the FTB in California will charge an $800 annual fee for being a member of a LLC irrespective of whether it is an in-state or out-of-state LLC, seems like it would be easier just to form the LLC in CA?
  • Since this structure should be treated as an investment property as opposed to a second home, are there any limitations in our personal use so long that we pay market rents?
  • What other considerations should I be thinking about?
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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    7y
    Originally posted by @Marc Villiaer:

    I was hoping I might be able to get some thoughts from the community around a potential real estate investment I’m considering making. Here is the general scenario:

    • Establishing a multi-member LLC in which my spouse and I will be the members. The LLC will be taxed as a partnership and will not be considered as a disregarded entity for IRS purposes.
    • The asset we are purchasing will be a condo in Colorado (we live in CA). The LLC will purchase the real estate asset and we have a lender that will be providing the loan (we are personally guaranteeing).
    • We intend the property to generate rental income as well as capital appreciation over time. We will rent out to third-parties and will also utilize the property around our vacations (with the intent to pay market rent to the LLC).
    • We would expect the property to generate a tax loss (largely as a result of depreciation expenses). We have sufficient passive income in which to utilize the passive losses that are generated by this real estate investment.
    • I’m already capped on interest rate deductibility and property taxes as a result of my primary residence.

    Questions:

    • Since the FTB in California will charge an $800 annual fee for being a member of a LLC irrespective of whether it is an in-state or out-of-state LLC, seems like it would be easier just to form the LLC in CA?
    • Since this structure should be treated as an investment property as opposed to a second home, are there any limitations in our personal use so long that we pay market rents?
    • What other considerations should I be thinking about

    Do you really need an LLC if it's husband and wife venture ?

    Interest deductibility is not caped as the state and local taxes are You said you were already capped. May be you were referring to mortgage limitation. This will come into play in your overall interest deductible if your rental property will subject to vacation home rules. See below. 

    If your personal use exceeds more than 14 days or 10% of your rental days, the house is considered vacation rental and is subject to limitation. You cannot create loss with this peopery. So your strategy of using loss from this peopery is not going to workout. If you keep the personal use below the 15 days, there is no loss limitation. 

    So, If your house is subject to vacation rental use, the personal use portion of the interest and taxes will be deductible in your personal return, if already not limited. You said you were limited so need to consider this too. 

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  • Marc Villiaer
    OP
    Member since 2019 · 3 posts · 1 vote
    7y

    The idea behind structuring it as a MMLLC (in this case my wife is the other member but it could be anyone or a broad syndicate as well) is that property will be held as a real estate investment entity. This investment entity will generate its own K-1 with the various income and expense (including mortgage interest, property taxes) that will flow to the members in the LLC. Because the entity will end up taking a net loss (due to expenses including mortgage interest, depectiation etc. net of rental income), this loss should flow to the members irrespective if they are over their personal mortgage interest deductibility cap. Because it is a real estate investment, the loss should be considered passive (and therefore can only be offset against passive income or carried forward). Additionally, because it is an investment entity and not a second home I own, I would think it may not be subject to the same personal use limitations.

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