Should I create an LLC?

10 Replies

Hello BP,

I am house hacking a single family and living in the basement. I hired a PM for the top unit, and they are requesting my social to report my rent income so it can be taxed. Since I am house hacking and this is my first property I didn't consider opening an official business such as an LLC. However since the PM is saying it's required I'm wondering if I should do that now so at least I can write off some expenses. Should I push back on the PM since it's a house hack or should I look into forming an entity now? Any advice would be appreciated here.

Thanks

LLC has no relevance to whether you are taxed or not (you are regardless of whether you have an LLC or not), in the same sense nor does an LLC enhance or increase any of your deductions.

He has to have your social likely to report your gross rents, you will offset that by your expenses when you report the rental activity on your income tax filings.


@Steve J.

For passive income, ie your rentals, your income and expenses are reported on SchE. That occurs whether you are "yourself," a single member LLC, a partnership or multi member LLC (where there is a partnership form to file).

The LLC is for liability protections, not tax purposes.

Yes, there are certain benefits to filing an LLC and also it will protect you from liabilities for those just in case situations! If you don't want to do it yourself, have a attorney who has mastered filing business formations do it for you.

Your PM will give you a 1099 which reports your gross income to the IRS. They should also provide a statement with their commission and any fees or repairs charged for your upstairs unit. They do need your SSN. On your personal return, complete a schedule E for the rental portion of your property where you will report the income and expenses on the rental portion of your property. You will need to prorate your annual insurance, property taxes, whole building repairs, utilities, etc expenses between your personal residence area and the rental area. You can never deduct personal residence expenses. If this sounds daunting, consult with a RE accountant to help you figure out depreciation and how to correctly prorate the mixed personal/rental expenses. Once you are off to a good start, then it just needs thorough attention to tracking and splitting your expenses from year to year. You do not need an LLC for tax reporting. I am not an accountant but have had rentals, sometimes with PMs, for almost 30 years.

Your PM will give you a 1099 which reports your gross income to the IRS. They should also provide a statement with their commission and any fees or repairs charged for your upstairs unit. They do need your SSN. On your personal return, complete a schedule E for the rental portion of your property where you will report the income and expenses on the rental portion of your property. You will need to prorate your annual insurance, property taxes, whole building repairs, utilities, etc expenses between your personal residence area and the rental area. You can never deduct personal residence expenses. If this sounds daunting, consult with a RE accountant to help you figure out depreciation and how to correctly prorate the mixed personal/rental expenses. Once you are off to a good start, then it just needs thorough attention to tracking and splitting your expenses from year to year. You do not need an LLC just for tax reporting. I am not an accountant but have had rentals, sometimes with PMs, for almost 30 years.

Everyone's already mentioned that he's looking to do a 1099. You don't need an LLC to operate as a business with write-offs and everything. However, if you do that you really should separate your finances (one bank account for you, one for upstairs). Also, when considering an LLC for a house hack, keep in mind you may lose your homestead exemption depending on your state. Do some research first.

@Steve J.

I agree with what has been said above. I went the LLC route for my first RE purchase for liability protections and now 2 years later I am moving it into my personal name. Borrowing is much easier as an individual than an entity and terms/rates are typically more favorable. If you are worried about liability, mitigate it through insurance. I took the route of adding an umbrella policy. Not to say LLCs don't serve good liability shield, but I think they work best on larger multi family or dividing up a bigger rental portfolio.

You don't need an LLC to get the tax benefits you're seeking. And really I don't see much of a point if that's the goal. You'll need to purchase your next property in your name and not with the LLC. Therefore, I don't see a lot of benefits for you at this time. Save your money.