LLC and Taxes with regards to rental property

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LLC and Taxes with regards to rental property

Brian Versetti
New to Real Estate · MUNHALL, PA · Member since 2021 · 6 posts · 2 votes

Hello to all, I am relatively new to owning and renting out property so any help here will be much appreciated! I have rent that comes in for one part of my building and before too long I should have additional rent from the other parts. My accountant, when doing my 2020 taxes, suggested I form an LLC to own my real estate and I am now trying to put my building into that LLC name to lessen my tax burden. So to my questions: what is the best way to transfer ownership of my building (I ask because a lawyer that I spoke to said that I must sell it to the LLC for what is considered a reasonable amount, is this true or partially, or is there abetter way to do this?

Secondly, once the property has been transferred how do I get the money into my hands with less tax burden than it being a w-2?

Thank you for all help!

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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
5y
Originally posted by @Brian Versetti:

Hello to all, I am relatively new to owning and renting out property so any help here will be much appreciated! I have rent that comes in for one part of my building and before too long I should have additional rent from the other parts. My accountant, when doing my 2020 taxes, suggested I form an LLC to own my real estate and I am now trying to put my building into that LLC name to lessen my tax burden. So to my questions: what is the best way to transfer ownership of my building (I ask because a lawyer that I spoke to said that I must sell it to the LLC for what is considered a reasonable amount, is this true or partially, or is there abetter way to do this?

Secondly, once the property has been transferred how do I get the money into my hands with less tax burden than it being a w-2?

Thank you for all help!

 Brain, we can tell you don't have good support here. 

1) Transferring/Contributing to the LLC is a non-taxable transition. Please don't sell it to the LLC.

2) LLC is not going to save you taxes.

3) The way you pay yourself is via distribution. Distribution is not taxable but you have to pay taxes when you earn that distribution.   

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  • Christopher Smith
    Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
    5y

    How will a single member LLC lower your tax? That's a new one on me.

    0Reply
  • Brian Versetti
    OP
    New to Real Estate · MUNHALL, PA · Member since 2021 · 6 posts · 2 votes
    5y

    @Christopher Smith

    To be honest I have no idea but my cpa told me to create an llc, he made it sound as if it would help with my tax liability.

    0Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    5y
    Originally posted by @Brian Versetti:

    Hello to all, I am relatively new to owning and renting out property so any help here will be much appreciated! I have rent that comes in for one part of my building and before too long I should have additional rent from the other parts. My accountant, when doing my 2020 taxes, suggested I form an LLC to own my real estate and I am now trying to put my building into that LLC name to lessen my tax burden. So to my questions: what is the best way to transfer ownership of my building (I ask because a lawyer that I spoke to said that I must sell it to the LLC for what is considered a reasonable amount, is this true or partially, or is there abetter way to do this?

    Secondly, once the property has been transferred how do I get the money into my hands with less tax burden than it being a w-2?

    Thank you for all help!

     Brain, we can tell you don't have good support here. 

    1) Transferring/Contributing to the LLC is a non-taxable transition. Please don't sell it to the LLC.

    2) LLC is not going to save you taxes.

    3) The way you pay yourself is via distribution. Distribution is not taxable but you have to pay taxes when you earn that distribution.   

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®4.9242 Reviews
    WebsiteView Page
    TaxMD® | Tax Planning Software
    WebsiteView Page
    4Reply
  • Brian Versetti
    OP
    New to Real Estate · MUNHALL, PA · Member since 2021 · 6 posts · 2 votes
    5y

    @Ashish Acharya First Thank you very much! Second I'd like to see if I am understanding correctly; I would "contribute " the property to my LLC, tax free and then I would pay myself through a distribution and the LLC is not taxed but I am when I recieve the distribution. Am I understanding you correctly?

    0Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    5y
    Originally posted by @Brian Versetti:

    @Ashish Acharya First Thank you very much! Second I'd like to see if I am understanding correctly; I would "contribute " the property to my LLC, tax free and then I would pay myself through a distribution and the LLC is not taxed but I am when I recieve the distribution. Am I understanding you correctly?

     Not correct! 

    Distribution is never taxed. You are taxed when you earn net income on your rental. Net income is also not equal to your cash flow.  There are many other posts describing this. If you are still confused, reach out to me after the 10/15 tax deadline. I am more than happy to help you understand this. 

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®4.9242 Reviews
    WebsiteView Page
    TaxMD® | Tax Planning Software
    WebsiteView Page
    0Reply
  • Brian Versetti
    OP
    New to Real Estate · MUNHALL, PA · Member since 2021 · 6 posts · 2 votes
    5y

    @Ashish Acharya I think I will reach out, but in the meantime I will do some research to try to at least get some basic understanding. I really appreciate your responses!

    1Reply
  • Account Closed
    Rental Property Investor · Indianapolis, IN · Member since 2020 · 562 posts · 554 votes
    5y

    @Brian Versetti

    Step 1: get an accountant that understands real estate.

    Step 2: refer to Step 1

    3Reply
  • Brian Versetti
    OP
    New to Real Estate · MUNHALL, PA · Member since 2021 · 6 posts · 2 votes
    5y

    @Dave E. Suggestions in the Pittsburgh area?

    0Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    5y

    Your CPA should not be suggesting an LLC as it relates to rentals.


    There is no tax benefit- in any way. 

    It only purpose is legal protection. 

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
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    1Reply
  • Jake HottenrottPro Member
    CPA · Belleville, IL · Member since 2014 · 255 posts · 269 votes
    5y

    @Natalie Kolodij - false, you can deduct the annual state filing fee of an LLC which you can not deduct if you do not have an LLC.

    1Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    5y
    Originally posted by @Jake Hottenrott:

    @Natalie Kolodij - false, you can deduct the annual state filing fee of an LLC which you can not deduct if you do not have an LLC.

     LOL True true - thanks jake 

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
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    0Reply
  • Jake HottenrottPro Member
    CPA · Belleville, IL · Member since 2014 · 255 posts · 269 votes
    5y

    @Natalie Kolodij - great tax pro told me that once #ItWasYou

    1Reply
  • Holly Chan
    Accountant · Bellevue, WA · Member since 2017 · 14 posts · 7 votes
    5y

    Absolutely agree with everyone above. One thing to add - don't issue a W-2 or pay yourself wages. You'll only end up paying payroll taxes which are unnecessary. Rental income is just that and will flow through onto your return as such.

    Are you doing other property management or earning other ordinary (not rental) income through the business? If so, that may be why the suggestion came up. This type of income could be considered self-employment income, in which case moving it to an LLC which pays you a reasonable salary could reduce payroll/SE tax. There are lots of other considerations here, too, so definitely consult with a CPA who's well-versed in choice of entity and real estate.

    0Reply
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