LLC to manage rental properties

4 Replies

We recently took over managing our properties on our own. My husband and I created an LLC to manage the units. The purpose of the LLC is to separate the income and expenses from the rentals from our personal expenses. We cannot put the properties in the LLC because we still have mortgage on these properties. Is this a bad idea since we cannot put the rentals on the LLC? We are new to this and are now unsure if we made the right move. Any suggestions on this are greatly appreciated. Thanks!

depending on income level may be a great idea. Ideally, if you have in excess of 100k in net then good idea if structured properly. The managing entity should elect to be taxed as an s-corp and make sure such entity charges enough of a management fee to shift all income to this entity.  Then you pay yourself a salary of about 40% (so long as reasonable in amount) with rest coming off as a dividend. Notably, the dividend is not subject to self employment taxes (I.E 7.65%) which is doubled up to certain threshold (cap on Medicaid portion of 1.45%) because you pay employee and employer side (over 15%).

In sum, on 100k in income where normally pay about 15k in self employment taxes, you can save 6k by using this approach. 

Somewhat complicated but get a good accountant. 

Thank you J Lee for the explanation! We will reach out to an accountant and have them review our situation.

@Mano G. - so the properties and mortgages are under you and your husband's name. LLC is created strictly for managing.

As the Managing LLC - take 25% of the management fee as your income, have all the expenses in the LLC. Do not pay yourself as an employee. Income will be left as retained earnings for the LLC.

You and your husband when filing the tax return will have a 25% decrease in income due to the management fees and any expenses related as Landlord.

But as always, speak to your CPA. I am an accountant who straightens the books for real estate management firms lol

Well you can probably still move the properties into the LLC with a quit claim deed, although it does risk the due-on-clause to kick in (although I've never heard of it actually happening).

For general thoughts on whether to have an LLC for rentals or not (read the comments too)-

If it's just about the money organization, just create a separate checking account that only deals with your rental properties. That's what I have. The mortgages are paid out of that account, the deposit of the cash flows every month or deposited there, and expenses only related to the properties go in and out of there. Totally separate from my regular checking account. I definitely don't think an LLC is required for that.

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