Dumb question(s) about investing profits / taxes

5 Replies

Hello, I'm a small business owner (my architecture business) and I also own a couple of investment properties. I hold one of these investment properties in an LLC (that I'm the sole owner of) and the other one my wife and I own jointly. I've been lucky enough in 2021 to build up some healthy profit in both the LLC (real estate business) and my architecture business that I will have some to invest still this year.

I know that I can take the profit, pay no tax on 20%, but be on the hook for tax on the remaining 80%. 

Is it possible for me to (rather than paying myself the profit first) - put the money in the LLC and use it to purchase property directly - IE: an investment for the business? I honestly don't know what this means for my tax liability - I want to get this right - both in terms of the smartest strategy and also following the rules.

I could also - instead of investing in a new property - use some of the $ to improve one of my properties - I have a bunch of it that's awaiting renovation and could then be rented out. I'm not sure if it makes more sense to pay cash for the renovation, or to take a loan to fund the renovation. 

Originally posted by @David Sisson :

Hello, I'm a small business owner (my architecture business) and I also own a couple of investment properties. I hold one of these investment properties in an LLC (that I'm the sole owner of) and the other one my wife and I own jointly. I've been lucky enough in 2021 to build up some healthy profit in both the LLC (real estate business) and my architecture business that I will have some to invest still this year.

I know that I can take the profit, pay no tax on 20%, but be on the hook for tax on the remaining 80%. 

Is it possible for me to (rather than paying myself the profit first) - put the money in the LLC and use it to purchase property directly - IE: an investment for the business? I honestly don't know what this means for my tax liability - I want to get this right - both in terms of the smartest strategy and also following the rules.

I could also - instead of investing in a new property - use some of the $ to improve one of my properties - I have a bunch of it that's awaiting renovation and could then be rented out. I'm not sure if it makes more sense to pay cash for the renovation, or to take a loan to fund the renovation. 

Congratulations on your successes!! 

I know that I can take the profit, pay no tax on 20%, but be on the hook for tax on the remaining 80%.
- this is not entirely correct. You don’t pay taxes when your take the profit. You pay when you earn it. Even if you don’t take the profit, you are still taxed. The 20% rule is also not as simple as that. It might go away if you are making decent money. There are ways to optimize it though.

Is it possible for me to (rather than paying myself the profit first) - put the money in the LLC and use it to purchase property directly - IE: an investment for the business? I honestly don't know what this means for my tax liability - I want to get this right - both in terms of the smartest strategy and also following the

- investing would be a balance sheet activity, not an income statement. You will not achieve what you are looking for with this. Rather, you could plan your real investment, outside of your business to offset you taxes. Also, you don’t want investment inside your corporation. Hopefully you are running your business as S-Corp. 

I could also - instead of investing in a new property - use some of the $ to improve one of my properties - I have a bunch of it that's awaiting renovation and could then be rented out. I'm not sure if it makes more sense to pay cash for the renovation, or to take a loan to fund the renovation.

- this is somewhat personal financial decision. Leveraging will multiply your returns, but you might not want additional debt. Also, from taxation, you don’t get to deduct the entire renovation the year you do them. Even if did get to deduct them, your losses might be limited under the PAL rules. You can plan your involvement and investing to be able to offset your income, but it takes time and working with your tax advisor.  

I think what you are talking about is retained earnings for your business.  Unless you are a corp, you are limited.

The best way to offset income is to buy and/or renovate property.  You can take expenses, bonus depreciation, closing, interest expense and so on.  I would do the reno in cash and do a cash out refi.  Renovation money can be expensive. 

The only issue to consider is if you are considered a real estate professional through the architecture business.  If you are not, would you wife qualify?  The important part is that if you are you can offset ordinary income, otherwise it can only off set passive income or a limit of 25k.

I am not an accountant, but this is my understanding.

I'm trying to learn. I'm still not certain:

My question in other words: ARCH BIZ CORP has $10,000. ARCH BIZ CORP gives (note: ARCH BIZ CORP actually does pay rent to REAL ESTATE LLC, not sure if this matters) the $10,000 to REAL ESTATE LLC. Now, REAL ESTATE LLC uses the $10,000 to fund the downpayment on a new investment property that's owned by REAL ESTATE LLC. Do I have to pay tax on the $10,000 this year? I own both ARCH BIZ CORP and REAL ESTATE LLC.