LLC's, QBI, and covering your ASSets!

6 Replies

So let me start with the back story and present situation... I own 4 long term rentals, and 1 short term rental out of state. I'm in the process of closing on a second out of state short term rental, and I self manage everything. I have my 4 long term rentals transferred into an llc, and all expenses run through a business checking account - other than the "due on sale" clause issue (since the mortgages on 3 of them are in my personal name) everything is fine with the current set up. Now to the higher end vacation rentals. I've been advised NOT to transfer those to an LLC, because it doesn't REALLY provide any asset protection, and it could cause 1031 exchange issues upon sale. Since everything is self managed I feel they are "active" investments and the income should qualify for the new 20% QBI tax deduction, so here's the real question: Can/should I run all expenses/income through a new LLC so it qualifies as a "real" business, and if so would I then be on the hook for self employment taxes, effectively nullifying the QBI deduction?

I've never spent much time on accounting practices, and I'm learning the hard way that these details matter! So with 4 long term (local) rentals, and 2 short term (long distance) rentals - how would you set up the business(es) for the simplest and most effective accounting? 

I noticed the QBI deduction only applies to LLC, s-Corps, etc so I'm wondering if it's worth it to operate through an LLC even if i have no intention of transferring said properties into the business.


Thanks in advance!
 

Simply put they qualify for QBI . Very rarely will rentals NOT qualify.  Anyone who tells you to use the safe harbor is setting you up for failure.

Oof there's a lot to tackle here- Hopefully you're working with a tax pro who specializes in REI to advise you.


Long term rentals will not be subject to SE taxes regardless of what entity they're in. 

An entity does not make something a "real" business. 

Meeting the level of IRC 162 is what qualifies an activity as a "business" to the IRS. 

This is what qualifies for the 199A deduciton. 

The safe harbor is pretty much garbage as Steven mentioned. 

Why do people equate entity status with tax status? I just saw a podcast on BP where the presumably "knowledgeable" presenter did this exact same thing. Absolutely amazing there are folks who you would assume should know better still spouting the same erroneous commentary.

Originally posted by @Christopher Smith :

Why do people equate entity status with tax status? I just saw a podcast on BP where the presumably "knowledgeable" presenter did this exact same thing. Absolutely amazing there are folks who you would assume should know better still spouting the same erroneous commentary.

Wish I knew. 

At least 25% of the people I talk to call me for the main purposes of making sure they are getting the most tax deductions/benefits possible from their LLC for their rentals.


And I'm like...yep. You are. I guarantee it. Because there are none. 

 

I actually created an entity for tax savings too as advised by CPA. It was something about pass through tax benefit, that can offset passive income against ordinary income. Is that not correct. Is there a good resource to read up so that I am not paying uncessarily.

Originally posted by @Vishal Sood :

I actually created an entity for tax savings too as advised by CPA. It was something about pass through tax benefit, that can offset passive income against ordinary income. Is that not correct. Is there a good resource to read up so that I am not paying uncessarily.

 

There is nothing correct about that. 

If you're doing flips, home selling or wholesaing- and thing that generates active income subject to SE taxes having an S corp can have offset that. 

If you have rentals and your CPA advised you that having an entity would save you money, you were 100% lied to and are paying for another tax filing for no reason.