New York, NY · Member since 2017 · 144 posts · 75 votes
Hi all,
any thoughts on whether LLC or S-Corp for Airbnb income? I'm thinking of an LLC taxed as an S-Corp.
Also, I'm looking to buy my first rental property with my father. We'd both put up half of the equity-- would I just need to create an LLC on LegalZoom and put both our names on it?
Investor · Roseville, CA · Member since 2016 · 893 posts · 1k+ votes
8y
Hi @Alex M., if you are talking about one property I don't think you need to worry about LLC at this stage in the game. Just do a joint tenant deed with your dad and get a $1M liability rider on your insurance and you should be fine...in my humble opinion. Once you get to 2 or 3 or over $1M in assets then it might be worth exploring more structured asset protection.
I'm no expert by any means, but I just hate seeing people over complicate asset protection because they listened to too many podcasts or guru articles on the topic. Ever investor situation is different however and you should make your final decision only after a discussion with your accountant and a real estate attorney to be safe.
Investor · Roseville, CA · Member since 2016 · 893 posts · 1k+ votes
8y
Hi @Alex M., if you are talking about one property I don't think you need to worry about LLC at this stage in the game. Just do a joint tenant deed with your dad and get a $1M liability rider on your insurance and you should be fine...in my humble opinion. Once you get to 2 or 3 or over $1M in assets then it might be worth exploring more structured asset protection.
I'm no expert by any means, but I just hate seeing people over complicate asset protection because they listened to too many podcasts or guru articles on the topic. Ever investor situation is different however and you should make your final decision only after a discussion with your accountant and a real estate attorney to be safe.
New York, NY · Member since 2017 · 144 posts · 75 votes
8y
Thanks @Jon Crosby
Interesting.... Thing is I have 6 properties in NYC which I currently have leases on and re-rent through AirBNB. I think I need to create a legal structure for these for tax purposes.
Secondly, I'm looking to start purchasing investment properties, and potentially raising capital for additional investments.
I spoke to a lawyer who said a General Partnership/ Limited Partnership might be a good model if I'm raising capital. But others have said LLC's are the standard. I do expect this business to grow, so wanted to establish the legal structures ahead of time.
My intuition says each house that I buy will be a separate LLC- thoughts? And any thoughts on a Series LLC?
Investor · Roseville, CA · Member since 2016 · 893 posts · 1k+ votes
8y
@Alex M. I think summed it up very nicely. You definitely have a more complex situation then I first thought so there are a variety of options. I don't know if NY even offers a Series LLC and if you did one in Delaware you would have to pay to have some representation there I think.
Seems like the de facto standard though is 1-2 in each LLC and if you can have an umbrella to house them all, then all the better. Each state is different though so I think you will definitely want to work closely with an attorney and accountant. No reason you can't have your LLC's and a GP/LP also...I think. Once again not an expert, it's call going to come down to what your goals are in the end for growth and asset protection.
Keep us posted on how it goes...sounds interesting!
Real Estate Agent · Sevierville, TN · Member since 2015 · 1k+ posts · 1k+ votes
8y
Talk to a tax advisor before taking any action - especially since the new tax law will likely have some direct impact (e.g. the new deduction that applies to some pass-through entities). To LLC or not to LLC is a widely debated topic on BP, and both sides of the equation have merit - but now that the new tax bill is here, I suspect the merits of those arguments will change. I think you're on the right track in talking to an attorney (whose advice you definitely want re: protection strategies), but a tax advisor will be able to speak most directly to the best economic strategy for your situation.
Rental Property Investor · South Lake Tahoe, CA · Member since 2016 · 65 posts · 41 votes
8y
I own a duplex and currently run a VHR out of one side and long term rent the other. I also run the booking side of a few other vacation rentals and offer consulting, design, and optimization services to Airbnb properties in my area. After research on my end, and a lot of back and forth with my CPA, we determined that an S-Corp would be the best business & tax structure for my situation. While my business is obviously a bit different than what you have established, it seemed the benefits of an S-Corp for the many moving but interchanging parts of my company would be the best fit.
I'd have to agree that a tax advisor whom comes highly recommend and you can trust would be your first step!
Every investor has a unique profile. Following are generalities.
LLCs: mostly for legal and risk management. From a tax-perspective, they allow pass-through, partnership, S-corp, or C-corp treatment
Series LLC: available in only a few states. The legal structure may not be honored by states that don't have Series LLC laws.
LLCs should be either (a) foreogn qualified or (b) domiciled in the same jurisdiction as the "risk."
"Parent-Child LLC structure:" not as robust as independent LLCs (for risk management), but could be more streamlined reporting and accounting - especially if you have partners.
Rental Property Investor · Tennessee Florida · Member since 2016 · 4k+ posts · 5k+ votes
8y
Big John Underwood and Jon Crosby always have great advice. Just call 4-5 different lawyers and see if they all have the same opinions. If not pick which one you like best.
Residential Real Estate Investor and Broker · New Orleans, LA · Member since 2016 · 55 posts · 19 votes
8y
Personal opinion...if you own real estate or operate a business, you expose yourself to risk. Operate in an LLC (or other entity like a trust) and make sure you do it right so as to not have anyone be able to 'pierce the corporate veil' should you ever find yourself in a lawsuit.
A regular LLC is a flow-thru entity doesn't file a separate tax return and is relatively cheap to have and do. Why not? I assume some people are suggesting that you buy real estate in your personal name. Without the protection of a company, your personal assets (home, personal bank account) are at risk.
Our accountant told us that the IRS views short term/Airbnb rentals as running a hotel- active income (ie, you are running a business). Even if you hire an outside management company. Therefore, we have an LLC that has elected to be taxed as an S-corp to have those S-corp advantages for active income.
BTW, at a conference, I heard an insurance expert say "insurance is like Swiss cheese". Of course, you should have it. Probably at the highest limits you can afford.
My opinion, insurance is like caulk on a house. It should not be your first (and certainly not your only) line of defense against water intrusion.
Rental Property Investor · Philadelphia, PA · Member since 2015 · 213 posts · 160 votes
8y
You can definitely do a GP/LP and LLCs as well, I see this all the time in CRE. An investor will be the GP and raise money through various LPs. The GP puts up a small amount of money, but in the controlling (and obviously "general") partner. The GP/LP entity then purchases properties through an LLC. However, you will need to be getting commercial mortgages for these and it seems like you're not in that situation. The umbrella insurance policies may be the best way to go, but as the others have said, probably best to talk with a few lawyers.
I'm curious about re-renting, does your lease not specifically say you cannot re-lease/sub-lease? Or are you just taking the risk?
Investor · Roseville, CA · Member since 2016 · 893 posts · 1k+ votes
8y
Hi @Andrew Wong, I don't operate my property as an LLC. I simply use a $1M liability umbrella on my insurance and since I use Evolve to book they have another $1M in liability coverage.
My VRBO is in my name and has a big mortgage on it. My long term rentals have no mortgages and are in my LLC's. One LLC is my ROTH IRA. (Buy properties cheap in Roth IRA make a bunch of money in rent and pay no tax on rent or capital gains when sold)
My VRBO is in my name and has a big mortgage on it. My long term rentals have no mortgages and are in my LLC's. One LLC is my ROTH IRA. (Buy properties cheap in Roth IRA make a bunch of money in rent and pay no tax on rent or capital gains when sold)
I understand buying and holding your properties under the LLC, but what about operating your short term rental business as a LLC? I think those are distinct things are they not?
My VRBO is in my name and has a big mortgage on it. My long term rentals have no mortgages and are in my LLC's. One LLC is my ROTH IRA. (Buy properties cheap in Roth IRA make a bunch of money in rent and pay no tax on rent or capital gains when sold)
I understand buying and holding your properties under the LLC, but what about operating your short term rental business as a LLC? I think those are distinct things are they not?
Andrew, I do not have have my VRBO in an LLC. It has a mortgage and Insurance, both provide asset protection.
New York, NY · Member since 2017 · 144 posts · 75 votes
8y
@John Underwood I like the Roth IRA idea. I am in the process of transferring my 401k into a self directed IRA.
Hypothetically:
Traditional IRA amount: $50K
My income for 2018: $100K
So if I shift my traditional IRA into a Roth IRA this coming year, will that $50K get taxed at the marginal tax rate at $150K? Seems like unless there's a way to offset some income, it wouldn't make sense given my high tax bracket.
@John Underwood I like the Roth IRA idea. I am in the process of transferring my 401k into a self directed IRA.
Hypothetically:
Traditional IRA amount: $50K
My income for 2018: $100K
So if I shift my traditional IRA into a Roth IRA this coming year, will that $50K get taxed at the marginal tax rate at $150K? Seems like unless there's a way to offset some income, it wouldn't make sense given my high tax bracket.
Noah,
Yes when you convert a traditional IRA to a Roth you must pay the taxes that were deferred.
You could convert it over several years and just pay the tax on what you are converting each year, or just bite the bullet and pay it all at once.
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
8y
@Alex M., when you decide to convert Traditional IRA to Roth IRA, the amount you convert becomes taxable income in the year that you convert. You are correct, the conversion may push you into higher tax bracket so be sure to consult with your CPA about the tax impact. Usually it is good to do the conversion in a year when your income is low.
Rental Property Investor · Round Rock, TX · Member since 2016 · 1k+ posts · 971 votes
8y
Insurance is more like protection against accidents, while asset protection is against litigation - insurance is not going to cover you all the time.
You want to separate your asset holding entity (which just hold your assets) from the public facing operations entity (which does the property management, leasing, hiring, etc).
You should read Garett Sutton book on Loopholes of Real Estate (both for asset protection scenarios and for why you might want to avoid joint tenant deed, plus is a good book for RE investors).
I spent hours researching the whole LLC question and asset protection matter and all the rabbit holes it opens, here on BP and other sources. I gathered it all in a 50+ pages document touching on formation and maintenance of LLC and business structures, transferring, strategies, trusts, anonymity, insurance, levels of protection, etc. including when you should do it, how many properties per LLC, due on sale clause, selecting an attorney, fees, checklists and resource materials. PM me and I can send it your way if interested.