LLC for tax purposes, W2 employee with RE, how to maximize

5 Replies

Would love some thoughts and help with my situation, 

My wife and I make decent W2 income as our main source of money but we have two properties. 1 that is a rental, I have a property management company handling it, and then our 2nd has an ADU to which we actively manage an AirBnB that has done quite well.

Typically when doing taxes, things are straight forward being a W2 employee but do to raises my wife and I find ourselves in an income range that significantly reduces the RE tax advantages. (good problem to have) Due to us not hitting the necessary requirements to be deemed a Real Estate Professional ( we are < 750 hours) and our combined income being > than 150k, we don't get to credit any passive losses to offset earned income. In short, I feel like I'm investing quite bit into improvements and repairs and then still having to pay a sum of money for taxes. Applying different deprecation strategies to the improvements does not seem to make a difference.  
Source: 
https://www.therealestatecpa.c...
https://www.therealestatecpa.c...

I'm curious if setting up a property management LLC to mange my AirBnB would help with this situation? From a liability standpoint, I get it, it wouldn't provide a ton of protection, an umbrella policy is much better suited. This is about tax savings. Some of the things I would like to do, move my vehicles or any future vehicles over to the LLC and "lease" them to employees (me and wife), buy material goods such as ipads or other systems for the purpose of enhancing the AirBnB, paying for websites, marketing or other business operations. I could then use the negative pass through income to hopefully decrease my taxable income?

I need to know if this makes sense or if there is a better option or route. When to LLC or not is always a confusing subject and seems to be very situational so I'm sure there are a lot of W2 investors who also have this same question. If the answer is, go see a CPA, well I talked to one, they weren't awesome in giving me a direction but I would be more than willing to find the right one to get the guidance if ultimately that has to happen. 

Thanks for all the help, 

Originally posted by @Levi Koskan :

Would love some thoughts and help with my situation, 

My wife and I make decent W2 income as our main source of money but we have two properties. 1 that is a rental, I have a property management company handling it, and then our 2nd has an ADU to which we actively manage an AirBnB that has done quite well.

Typically when doing taxes, things are straight forward being a W2 employee but do to raises my wife and I find ourselves in an income range that significantly reduces the RE tax advantages. (good problem to have) Due to us not hitting the necessary requirements to be deemed a Real Estate Professional ( we are < 750 hours) and our combined income being > than 150k, we don't get to credit any passive losses to offset earned income. In short, I feel like I'm investing quite bit into improvements and repairs and then still having to pay a sum of money for taxes. Applying different deprecation strategies to the improvements does not seem to make a difference.  
Source: 
https://www.therealestatecpa.c...
https://www.therealestatecpa.c...

I'm curious if setting up a property management LLC to mange my AirBnB would help with this situation? From a liability standpoint, I get it, it wouldn't provide a ton of protection, an umbrella policy is much better suited. This is about tax savings. Some of the things I would like to do, move my vehicles or any future vehicles over to the LLC and "lease" them to employees (me and wife), buy material goods such as ipads or other systems for the purpose of enhancing the AirBnB, paying for websites, marketing or other business operations. I could then use the negative pass through income to hopefully decrease my taxable income?

I need to know if this makes sense or if there is a better option or route. When to LLC or not is always a confusing subject and seems to be very situational so I'm sure there are a lot of W2 investors who also have this same question. If the answer is, go see a CPA, well I talked to one, they weren't awesome in giving me a direction but I would be more than willing to find the right one to get the guidance if ultimately that has to happen. 

Thanks for all the help, 

1)  Airbnb is not inherently passive activity (unlike rentals) but looks like you don’t have a loss there. So the expenses here would directly go against the income without the management comp. 

2) yes, converting your expenses via PM company to active loss works but needs to be structured correctly. You cannot be employees of your partnership (Only if you elect to be taxed as S-Corp). Once you provide the vehicle to partners/employees, you have to do more work to track some tax issue. 

I wouldn’t suggest incurring more expenses just to decrease your taxes. If you are just trying to move some expenses out of the passive activity (not Airbnb), then it’s ok. But you just have one passive rental property for now, so do a cost benefit analysis. 

@Levi Koskan

Your situation is not black and white. Your ADU/AirBnB may not be passive and may allow you to take losses regardless of your W2 income. I cannot tell you one way or the other without a detailed discussion, and such discussion is not possible on this forum. If this property can indeed generate deductible non-passive losses (TBD), then depreciation enhancement techniques will be useful.

You cannot create a bogus management company to generate tax losses. It will not hold water if challenged. Have you seen a property management company that operates at a loss? Management companies can be created, but for different purposes, such as generating earned income for retirement contributions. It is not always helpful, and it has to be done right.

Having a rental unit on the same property with your own residence creates an extra level of complexity, and even tax professionals sometimes disagree on the technical details in this situation.

Bottom line: I would not DIY this. If you're looking for tax help, this forum features 20+ of my colleagues, all of us are real estate specialists. Also, all of us are very busy at this time of the year and may or may not be accepting new clients.

Thanks for the responses, shows how much I don't know. 

I agree @Michael Plaks , I think the correct move, only move, is to find a real estate specialist CPA and get a tax plan put together. If you know of a colleague in the Austin area I should consider, I would be very appreciative.

Due to the winter weather event we had in Texas, taxes aren't due till June so hopefully that provides sometime to find a good partner. 
Source:
https://www.irs.gov/newsroom/i... 

Thanks again for the help!

Im reaching out to a CPA but thought I would leave this here. I did just learn that I think what I was looking for was filing a schedule E or better yet a schedule C on my taxes. A LLC probably isn't necessary.

Schedule C is for a sole proprietorship business. For AirBnB, you have to provide services in addition to just the lodging to be considered a business. I do provide concierge services to guests as well as on-call maintenance so hopefully, the CPA tells me I qualify.
https://www.irs.gov/forms-pubs...

source:
https://sharedeconomycpa.com/b...