Business LLC for Rehab to Rent

Bridgewater, NJ · Member since 2016 · 24 posts · 2 votes

Hi Guys,

Looking to do a BRRRR. Do you guys do the buy and reno in one LLC (S-corp) and then transfer to another LLC (PASSIVE) for rental income?

How do you transfer after the reno into the passive rental LLC?

Looking at Mark Kohler and he suggests using this structure for operations vs passive income.

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Christopher Smith
Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
5y
Do you risk tax gain recognition when you move the property from the LLC S Corp to the LLC?
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
5y
Originally posted by @Hetal Patel:
Hi Guys,

Looking to do a BRRRR. Do you guys do the buy and reno in one LLC (S-corp) and then transfer to another LLC (PASSIVE) for rental income?

How do you transfer after the reno into the passive rental LLC?

Looking at Mark Kohler and he suggests using this structure for operations vs passive income.

Mr.Koehler's book doesn't ask you you transfer rental from S-corp to LLC. Although contribution to your S-Corp will not be a taxable, taking out the property, i.e. distribution, from the corp will be taxable event. So taking out your property from the S-corp to LLC is not recommended.
You shouldn’t be contributing your rental property into the S-corp in the first place. The rental activity is already passive activity and S-corp will not be providing you any tax benefits. Also, rehabbing your rental is not a different operation that is different from operating/renting your rental.
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Christian Stoecklein
Accountant · Pittsburgh, PA · Member since 2021 · 66 posts · 30 votes
5y
@Hetal Patel my guess is Kohler is referring to flips and not BRRR when talking about the S-corp.
Christian
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David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
5y
@Hetal Patel
Its been a while since I read his book. However, as I recall he didn't advise starting in LLC and moving Title into another. I remember him advising to make sure you take Title "correctly." Maybe his had the idea (I may remember it incorrectly) to move the LLC around. That is, if you have one LLC per Title and that LLC is owned by your other LLC, you can transfer ownership of the TItle holding LLC between your passive or active LLC.
The S-Corp status would only be useful for your flips since that is active income. The issue is what if your flip needs to be rented. For the short term, you would have to "suck it up." Granted, potentially there is no taxable gain because of depreciation so there is no issue.
In short, if your strategy is to buy and hold (regarldess if there is a reno), you need to keep it in a "passive structure." if you are going to hold it short term / flip it, then you need an "active income structure" such as a S Corp
Or, I think he does talk about having a mgt llc and "property LlL's." Basically, you keep the TItle of the properties in one (set) of LLC. Meanwhile, you rent it out via anotehr LLC, the Mgt LLC. Its another layering of defense. Should the tenant sue, their landlord is the Mgt LLC. The Titles are one step removed...
I hope this rambling helps.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
5y
@Hetal Patel

It is normally not advised to hold appreciating property such as a 'brrrr' within an S-corp.
First - there will not be a tax benefit for doing so.
Second - distribution of an appreciating property by an S-corp will be considered a taxable event and taxable to its shareholders.
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