Can I use my LLC to manage rental properties it doesn't own?
Member since 2018 · 8 posts · 1 vote
Can I use my LLC to manage rental properties it doesn't own?
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- Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes7y
I set up a management company under a C Corp to manage my properties, collect rents for the landlord (myself) etc.
So if you collect $2,000 in rent, the transaction will be booked thus:
Debit cash: $2,000
Credit Payable to landlord: $2,000 (yourself)
You can finesse the above to book management fees if any. Then you issue a check to yourself from the management company to clear the payable.
- Member since 2018 · 8 posts · 1 vote7y
Originally posted by @Frank Chin:
I set up a management company under a C Corp to manage my properties, collect rents for the landlord (myself) etc.
So if you collect $2,000 in rent, the transaction will be booked thus:
Debit cash: $2,000
Credit Payable to landlord: $2,000 (yourself)
You can finesse the above to book management fees if any. Then you issue a check to yourself from the management company to clear the payable.
@Frank Chin , thanks for your comment.
If I set up member manages LLC (not a C corp), will it work the same way? And did you create contract between the landlord (yourself) and the company?
Thanks again.
Ton.
- Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes7y
I don't know what motivation or purpose you have in doing this. I'll tell you the idea behind mine.
I set up the "C Corp" management company over 20 years ago, which I no longer need, and terminated. I had rentals, besides a "car repair" business in an LLC and a "computer consulting" business via a S Corp which my wife conducted her business through a DBA.
The problem before Obamacare was health insurance, and when I left my last employer, I continued under their health plan initially costing me $600/month. Within 6-8 years, I had to get my own and it rose to over $1,500/month, and I got a notice that it was to go up another 10%. So it seem to make sense to have the businesses covering it, but how?
I could put it under my auto repair business. However, it's got 8 employees and if I get a company plan, cheaper, I had to cover everyone. I can't charge it off on the schedule E as it is not an expense for a rental business. I didn't do much computer consulting by then, my wife didn't do $20,000 in business where I can deduct $20,000/year. But my rentals were generating more than enough income to cover.
After much research, establishing the C Corp to do it was the best. There's several issues involved in doing it. The first one was incorporating the business and I had to put down the purpose of the company. The instructions was that "if the stated business purpose requires a license to operate, I would have to furnish proof of the license." I know a real estate management business requires a broker's license or they will reject the application. So I stated the purpose was to provide business and management services for clients. It went through that way.
The other issue I realized is the operation of the management company. A management fee was collected, which was enough to cover the health insurance. The other was the issue of taxes, the major one being double taxation. So the management company on an annual basis reports very little or no income, just enough income the expenses.
As to a contract between me and the management company, I don't have one. I'm suppose to hold annual meetings, and have minutes of the meetings, and somewhere I had to cover what employee expenses the company covers, and how it charges the management fees. initially, I charge fees for some properties and not others, so manage the annual income so it would be close to zero. I wrote such a memo for my files. Later I found there are companies that I can hire that write up the annual meeting minutes for you.
The end result was I have a line item for property management fees on the schedule E, totally legit. The C Corp shows the fee income and medical insurance expenses, also legit, as the company policy was to cover employee medical insurance. The nice thing is the plan also covers my co-pays and deductibles, which theoretically run thousand of dollars a year.
The major issue you have to confront is rentals is a passive activity for income tax purposes, no social security and Medicare tax due. Once you charge management fees passing through an LLC or a C Corp or S Corp where you pay yourself, you have tax issues. You have to pay the employer and employee part of SS taxes. If you don't charge fees, then what is the purpose of the management company?
First of all, the way your LLC is managed has nothing to do with the way it is taxed:
Single Member LLC (either member managed or manager managed) can be taxed as disregarded entity, C corp or S corp.
Multi Members LLC (member managed or manager managed) can be taxed as partnership, C corp or S corp.
The way the LLCs are taxed is an election you make with the IRS. If you don't make that election, it will default to disregarded entity for single member LLC and partnership for multi member LLC.
as @Frank Chin wrote, usually the purpose of a management structure is to maximize fringe benefits (like reimbursement of health expense, contribution to retirement accounts, etc...) and to maximize pre-tax deductible expenses. It is usually best achieved with a C-corp. To avoid double taxation and the conversion of passive income to active income, these entities often makes very little money. They collect just enough management fee to keep the net income low. The bulk of the income of the properties are going directly to the owners of the properties: the management entity collect all the rents but pay back the owner and issue a 1099-MISC. These rents collected are not considered income for the management entity, only the management fee are
The second issue that you mentioned was the need for a license to manage properties. I don't know which state you are operating in, but in FL you don't need a license if you manage your own property. Depending on the state, there could be different way of interpreting ownership. Does it mean that the property needs to be under the name of the manager? Does it mean that the manager has some beneficial ownership of the property? Does it mean that the beneficial owner of the managing entity is also a beneficial owner of the property?
In my case, all my properties are owned by different single member disregarded LLCs. All of these LLCs are owned by a WY multi members holding LLC.
My management entity is a C corp, that is also a minority member of the WY LLC. As such the C Corp 'owns' a piece of the properties that it manages.
The property owners (LLCs) signed a management contract with the C-corp to act as manager.
- Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes7y
Originally posted by @Mike S.:
First of all, the way your LLC is managed has nothing to do with the way it is taxed:
Single Member LLC (either member managed or manager managed) can be taxed as disregarded entity, C corp or S corp.
Multi Members LLC (member managed or manager managed) can be taxed as partnership, C corp or S corp.
The way the LLCs are taxed is an election you make with the IRS. If you don't make that election, it will default to disregarded entity for single member LLC and partnership for multi member LLC.
as @Frank Chin wrote, usually the purpose of a management structure is to maximize fringe benefits (like reimbursement of health expense, contribution to retirement accounts, etc...) and to maximize pre-tax deductible expenses. It is usually best achieved with a C-corp. To avoid double taxation and the conversion of passive income to active income, these entities often makes very little money. They collect just enough management fee to keep the net income low. The bulk of the income of the properties are going directly to the owners of the properties: the management entity collect all the rents but pay back the owner and issue a 1099-MISC. These rents collected are not considered income for the management entity, only the management fee are
The second issue that you mentioned was the need for a license to manage properties. I don't know which state you are operating in, but in FL you don't need a license if you manage your own property. Depending on the state, there could be different way of interpreting ownership. Does it mean that the property needs to be under the name of the manager? Does it mean that the manager has some beneficial ownership of the property? Does it mean that the beneficial owner of the managing entity is also a beneficial owner of the property?
In my case, all my properties are owned by different single member disregarded LLCs. All of these LLCs are owned by a WY multi members holding LLC.
My management entity is a C corp, that is also a minority member of the WY LLC. As such the C Corp 'owns' a piece of the properties that it manages.
The property owners (LLCs) signed a management contract with the C-corp to act as manager.
I took the real estate licensing course and in NYS, passed the licensing exam, and aware you also don't also need a license to manage your own property, but is required when you manage for others. Checked around, and I'm told "what if I told them the story I'm only managing my own property, they allow me the name that includes '....... property management', what would prevent me from then managing the property for others later on without a license, unless I submit proof of licensing". The instructions only reads, "they may decline the name if the name involves a business that require licensing". With that, why ask for trouble? They don't have a way of monitoring it, i.e. if I said one thing and do another. I thought about it, and they're right, I can do that and fool people thinking I'm licensed, unless clients are smart enough to check. I only need the "C Corp" to flow expenses through and have no time or need to get into arguments with the Department of State in NY.
I also personally own my rentals, they're not in LLC's. Same for the C Corp. The best thing for someone planning to do this is to hire a CPA/Attorney familiar with laws of the state to review things and draft needed documents.
- Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes7y
Just to add, the test here in NYS is if your collecting rent for others, and the rent checks are made payable to you. If so, besides a broker's license, you're must be bonded as well.
In my case, the entire rent checks are issued to myself. I then issue a monthly management fee to the C Corp. My own CPA does some property management for clients of his, the tenants send him the rent checks, but not payable to him. In a PM situation, the checks are issued to the PM who deducts the fee and forward the rest to the client. In my CPA's case, the checks are payable to the landlord (his client), and fees are paid to him separately by his landlord client. They can't get after him for not having a broker's license because he doesn't need one. He's just a messenger bringing checks to the bank.
How the financial transactions are handled determines if and what type of contracts are required between the parties.
I read of cases, including ones on real estate sites, where the PM have collected rents, payable to the PM, absconded with the money and disappeared. The owners are out of luck if the PM is not licensed or bonded.
- Member since 2018 · 8 posts · 1 vote7y
Thanks for very insightful info. My motivation on this is two folds.
1. I am in Washington state, and I have a long term plan of using this LLC to manage more properties and eventually would like to have it own the properties completely. It is not possible now because I can't get a mortgage under the LLC. No lender would do since it is so new. So I just thought that having income flowing through will be a starting point.
2. To maximize expenses on property management activities and clearer in terms of keeping the book clean for filing purposes. Also to deduct future expenses in acquiring more properties.
This is what my accountant friend recommended, but she doesn't know how to set it up right between the LLC and me (who owns the property).
- Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes7y
It's my understanding that Washington State requires its property management companies to be licensed. I'm not sure if you're exempt if you own the LLC and it's managing only your own property, but well worth checking into. But if you own an LLC and you're the only one self-managing from the LLC that's not much protection, anyway, so may be better to just self-manage and get extra liability/umbrella insurance to protect you until it's worth it to move everything over to an LLC.
- Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes7y
If your object is to show income going forward, managing properties via an LLC is not the way to do it. if you expand it t manage for others, you'll need to be licensed, in my state. I've done RE investing, and depending on what you buy, the way is to do rentals, wait for rents to go up, buy more rentals. Banks look at our tax returns mainly, and for rentals, what we got on our schedule E. If you're a small investor, the LLC would most likely be a pass through, with the income showing up on your personal 1040 anyway.
I mentioned I had an active business in an LLC. I bought an existing business, banked with Chase, the previous owners bank which I'm told would be beneficial to use them, waited a few months after I got the business, applied for a $200K SBA loan, and it was easily approved. The approval was based entirely on the bank's records business records with the previous owner, the business had good income, and as I recall, asked very little on my income tax records. It did require my personal guaranty though.
Years earlier, was trying to do refi's for my rentals, not so much to cash out, but to take advantage of dropping interest rates. I was refinancing one or two mortgage that had a 12.5% rate to 7.5%, which is how far rates dropped from the mid 80's to the mid 90's. Even with our excellent income, the bank was concerned first with the number of mortgages, income ratios etc. Bottom line is, they were looking at our individual tax returns, using their own guidelines. With our five rentals at the time, common sense who tell you if I can cash flow at 12.5%, we'll do spectacular at 7.5%. It was a local S&L.
Then we happen to chat with our bankers at Citibank, before the term "wealth accounts" became popular, and they have a variation of that back then. Told them of the problems with the S&L. They have files on us, took a quick look, told us we have no problems with you guys having 5 mortgages. We partnered with our mother in law, and with the way the S&L was looking at it, it was totaling 8 mortgages between us. The way Citibank looked at it, you guys got good income, immense equity with the properties, cash flowing at 12.5% interest, so what's the big deal. Exactly what we thought.
I remember the account officers at Citi saying to us "why didn't you talk to us first"? Looking back, that was why we got the SBA so easily with Chase, there was a banking relationship. We now have wealth accounts at Citi and Chase. Citi sent me a birthday ecard but Chase called me and when I answered the phone to figure out why they're calling me based on the caller ID, my personal banker said "I just want to wish you a happy birthday". Later, when I spoke to Citi, thanked them for the ecard, but told them Chase did better, they called me.
Looking at your plans on using a LLC managing properties to better your finances in the future, I don't see it. In my case, I use the C Corp management company so I can write off $20K that I normally wouldn't been able to do. But it does nothing to boost my credit worthiness with any banks.
Hey @Mike S., loved your post. Your strategy of holding LLC, managing LLC and owning LLCs for each of your property makes sense to me. I own an MFR under an LLC in CA but the LLC is a DE LLC to avoid the $700 annual LLC tax in CA. I want to manage the property myself now. Should I form a new LLC for rent collection? I don't want the LLC that the property is owned by be exposed to tenants. I also don't want that LLC to be categorized as a rent collecting/property management LLC. Do you think forming a new LLC in DE for the sole purpose of rent collection in this scenario makes sense? Tax-wise would it be treated similarly to the other LLC and any income would be pass-through so I'm not double taxed?
Finally I had to register the owning LLC with the city and get a business license. Would I have to do that again for the new LLC?
Thank you and hope to hear from you soon, your insight is invaluable in this.
- CPA and Attorney · San Diego, attorney · Member since 2022 · 302 posts · 219 votes3y
Have you looked into the definition of "doing business" in CA and whether you are in fact exempt from the $800 annual tax? I'm not sure how you have it set up that the LLC that owns the property would avoid any risk from tenants, even if paying rent to a management entity? Also, have you looked into the rules in CA about managing real property and when a broker's license is required, especially if considering a separate entity to act as manager? Some food for thought.
*This post does not create an attorney-client or CPA-client relationship. Readers are advised to seek professional advice.
For CA, look at Clint Coons Youtube videos.
- Honolulu, HI · Member since 2008 · 3k+ posts · 2k+ votes3yAloha,
Quote from @Mike S.:
I am not aware of all the CA specificities.
In my case, my management corp is a 1% member of the holding LLC so, as a co-owner of the properties, it was exempt from real estate manager license requirement.
I am not an expert with regard to tax avoidance or isolating liability, but all of the above, while certainly creative, I must ask... has your management arrangement ever been tested in court, or approved in writing by the RE licensing authority? I would be surprised, even in Florida, of a Judge agreeing that a dozen or fifty 1% "interests" would meet the standard for RE licensing requirements. If the interests were 51% each, I could see it... I totally get that there are tax advantages, but particularly for the comment above that "rent checks are issued to myself", seems like that would easily and quickly break any "corporate veil" of liability isolation. I don't know what is your exact situation, but for me a management corporation is so much more than just collecting rent.
It is the corporation I can take a salary from and fund a solo 401k. It is the corporation that reimburse all my ancillary expenses and purchases that I am using for my investments. It is also reimbursing my vehicle mileage and medical expenses.
Also you may need to have the entity registered in the state where the properties are as you need to have a local situs if you need to start an eviction or other legal action.
Quote from @Richard F.:
I am not an expert with regard to tax avoidance or isolating liability, but all of the above, while certainly creative, I must ask... has your management arrangement ever been tested in court, or approved in writing by the RE licensing authority?The statutes explicitly exempt licensing when self managing your own properties. I didn't research case law on that matter but I am not worried as eventually I am still the 100% beneficiary of the property.
But you are perfectly correct that when using entities, you need to make sure that the flow of money is respecting each entity. You should not get money to yourself directly as it will be used to weaken the veil of your entities. If you don't respect your entities, why should a judge do?
Quote from @Richard F.:
Tax avoidance is illegal. Tax optimization is not.
- Member since 2023 · 9 posts · 0 votes3y
Sounds like you set your LLC up as a management company. So, yes you can manage properties you personally own, own in other entities, or other investors own (clients). I am assuming you are filing as 1120S, not disregarded entity. If so, charge yourself a management fee that is of market value for your services and include in gross receipts.
I have my properties under an a state based LLC, then I have a management LLC that actually engages in the business with property mangers, contractors, etc. Both are under a holdings LLC. The management LLC actually engages in business, the property LLC literally just holds title. Nothing else.
Quote from @Mike S.:
I don't know what is your exact situation, but for me a management corporation is so much more than just collecting rent.
It is the corporation I can take a salary from and fund a solo 401k. It is the corporation that reimburse all my ancillary expenses and purchases that I am using for my investments. It is also reimbursing my vehicle mileage and medical expenses.
Also you may need to have the entity registered in the state where the properties are as you need to have a local situs if you need to start an eviction or other legal action.
Thanks for the reply. I am not yet in a position to be able to draw a salary from it. But I just wanted to make sure I setup the right structure. Now it seems clear that the entity owning the title should probably not be the same as collecting rents and best to form the later in the same state.- 3yJay ThomasPro MemberReal Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
If you are self-managing your real estate investments, you may want to consider getting extra liability or umbrella insurance coverage. This could provide additional protection for yourself and the property in case of any legal issues that arise down the line. In Washington State, it is a requirement for property management companies to be licensed. It is worth looking into if an LLC would exempt you from this requirement if you only manage your own properties; however, even with an LLC, there may not be much protection provided unless additional insurance coverage is added. Therefore, it might be more beneficial to simply self-manage and add the extra coverage instead of setting up an LLC.
- 3yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
Question: is it possible to have my LLC manage the properties that I own personally
Answer Yes:
Question: Should I
Answer: it depends
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