Is the cash flow 100% tax free if you own 100% of the property?

32 Replies

@Jan Van der vorm I would speak with your accountant as there are plenty of tax write-offs available for your property. If you can't write off all of the income, you may consider investing more money in the home if the area can sustain a rental increase. Depreciation, property management, maintenance and repairs, capital expenses, etc. You may even consider refinancing and purchasing another property with the equity payout. That would create even more tax write-offs but probably lower your immediate cash flow depending on the financing terms.

Originally posted by @Jan Van der vorm :

I own a investment property that is 100%

Owned by my LLC after paying back the loan.

Now the property in Indianapolis is cash flowing $700 per month. Is this tax free?

How much you owe on a single property doesn’t change the tax burden gross number, just the net number. 

Your cash flow is higher per month however you lose your interest write off and ability to scale if that is your goal.  

    But overall your situation is yours.  If you are trying to grow then getting a mortgage to be able to use the money for your next down payment would allow you to grow to what you are wanting to grow to.  

Originally posted by @Jan Van der vorm :

I own a investment property that is 100%

Owned by my LLC after paying back the loan.

Now the property in Indianapolis is cash flowing $700 per month. Is this tax free?

It can be done but not easy to do. The smartest thing to do is have the money going to an LLC and paying yourself as an employee. That step alone decreases your tax liabilities.

What you pay income tax on is what income is left over after all the deductions and depreciation. On many properties, it's not that much (if any)

What percentage you own the property just determines what percentage of the taxes you're responsible for. If you own 100%, then you're responsible for 100% of the applicable taxes.

If you're investing from outside the USA, then I'm not sure what all tax liabilities you have.

$700 per month in cash-flow is amazing. The tax write offs to minimize your tax burden is the other piece. Hopefully you're tracking all the business expenses and organizing it for a CPA. That fee is also a write off. Cheers. 

It depends on what you use the income for, if you use the income to pay for other properties or use it on home expenses or anything for the business then it wouldnt be all taxable, but like Ross Denman said, talk to an accountant. 

@Jan Van der vorm

As @Brie Schmidt said, rental income is taxable. That said, cash flow does not always equate to taxable income. For example, depreciation is a noncash expense that reduces your net taxable rental income and could possibly result in a net tax loss, effectively making the cash flow "tax-free".

As mentioned by others above, you should speak with a CPA to ensure you are maximizing tax deductions and keeping most, if not all, of that cash flow in your pocket.

Originally posted by @Jonathon Weber :
Originally posted by @Jan Van der vorm:

I own a investment property that is 100%

Owned by my LLC after paying back the loan.

Now the property in Indianapolis is cash flowing $700 per month. Is this tax free?

It can be done but not easy to do. The smartest thing to do is have the money going to an LLC and paying yourself as an employee. That step alone decreases your tax liabilities.

Huh????

You pay taxes just like any employee on the "salary" your LLC pays you, plus 15.3% self employment taxes....more like the dumbest thing you could do.

Originally posted by @Wayne Brooks :
Originally posted by @Jonathon Weber:
Originally posted by @Jan Van der vorm:

I own a investment property that is 100%

Owned by my LLC after paying back the loan.

Now the property in Indianapolis is cash flowing $700 per month. Is this tax free?

It can be done but not easy to do. The smartest thing to do is have the money going to an LLC and paying yourself as an employee. That step alone decreases your tax liabilities.

Huh????

You pay taxes just like any employee on the "salary" your LLC pays you, plus 15.3% self employment taxes....more like the dumbest thing you could do.

When you run your real estate business through an LLC it allows you to pay yourself a reasonable salary and the remainder of the money you were paid (or technically your LLC was paid) you can distribute to yourself as an owner draw (also known as a distribution) (which is separate and distinct from your salary). The salary versus the owner draw distinction is the critical part of all of this.

Why you say? Because you ONLY pay self-employment tax on your net income (or net salary), and you do not pay self-employment tax on the money that you distribute to yourself as an owner draw. I know it sounds crazy, but that is what I am told. So effectively, by not paying self-employment tax on the owner draw component (versus the salary), you may end up saving significantly on your taxes.

@Jonathon Weber

That would be true if rental income was Ordinary income but Rental income is Passive income, there is no self employment tax. This method as you described is advised for flipping profits, which are Ordinary income, to reduce the amount subject to self employment tax.....maybe that’s what you’re confusing it with. 

@Jonathon Weber

If you do an LLC (not an S Corp) there is no difference in between an owner draw vs paying a salary. An LLC profits flows down as ordinary income on your W-2. It makes no difference how you take it but your paying Uncle Sam.

there is a difference with an S Corp (that is more complex) but an LLC does nothing for tax purposes. LLC is used for asset protection not taxation.

When you run your real estate business through an LLC it allows you to pay yourself a reasonable salary and the remainder of the money you were paid (or technically your LLC was paid) you can distribute to yourself as an owner draw (also known as a distribution) (which is separate and distinct from your salary). The salary versus the owner draw distinction is the critical part of all of this.

Why you say? Because you ONLY pay self-employment tax on your net income (or net salary), and you do not pay self-employment tax on the money that you distribute to yourself as an owner draw. I know it sounds crazy, but that is what I am told. So effectively, by not paying self-employment tax on the owner draw component (versus the salary), you may end up saving significantly on your taxes.

@Chris Seveney - I think you are confused, with rental income and an LLC there is no W-2, there is no "salary", there is not a difference between an owner draw vs another other distribution of income

@Wayne Brooks is right, you do not pay self employment tax on any rental income held in your personal name or LLC.

I was referring to a comment above about fix and flips which are taxed as ordinary income. Some people (including myself) take a salary from the LLC on income that is taxed as ordinary income as it assists in getting bank financing by showing a salary versus taking it out in chunks. 

I agree on rental income that it is taxed differently 

Originally posted by @Brie Schmidt :

@Chris Seveney - I think you are confused, with rental income and an LLC there is no W-2, there is no "salary", there is not a difference between an owner draw vs another other distribution of income

@Wayne Brooks is right, you do not pay self employment tax on any rental income held in your personal name or LLC.

Originally posted by @Chris Seveney :

@Jonathon Weber

If you do an LLC (not an S Corp) there is no difference in between an owner draw vs paying a salary. An LLC profits flows down as ordinary income on your W-2. It makes no difference how you take it but your paying Uncle Sam.

there is a difference with an S Corp (that is more complex) but an LLC does nothing for tax purposes. LLC is used for asset protection not taxation.

When you run your real estate business through an LLC it allows you to pay yourself a reasonable salary and the remainder of the money you were paid (or technically your LLC was paid) you can distribute to yourself as an owner draw (also known as a distribution) (which is separate and distinct from your salary). The salary versus the owner draw distinction is the critical part of all of this.

Why you say? Because you ONLY pay self-employment tax on your net income (or net salary), and you do not pay self-employment tax on the money that you distribute to yourself as an owner draw. I know it sounds crazy, but that is what I am told. So effectively, by not paying self-employment tax on the owner draw component (versus the salary), you may end up saving significantly on your taxes.

"If you do an LLC (not an S Corp) there is no difference in between an owner draw vs paying a salary. An LLC profits flows down as ordinary income on your W-2. It makes no difference how you take it but your paying Uncle Sam."

*********A single member LLC is NOT allowed to take a salary.

"An LLC profits flows down as ordinary income on your W-2."

***************An LLC profits do NOT flow down on a w2 in any situation.

If you're a partnership or an S corp your net profits show up on a form K-1, and if you're an S corp you must also take a reasonable salary, That is reported on a W2. 

An S corp should almost never be used for  rentals, and shouldn't really be being discussed in this thread. There was just some confusion earlier on. 


This was a lot of semi-incorrect information that's just going to further confuse people on this post unfortunately. 

Originally posted by @Jonathon Weber :
Originally posted by @Jan Van der vorm:

I own a investment property that is 100%

Owned by my LLC after paying back the loan.

Now the property in Indianapolis is cash flowing $700 per month. Is this tax free?

It can be done but not easy to do. The smartest thing to do is have the money going to an LLC and paying yourself as an employee. That step alone decreases your tax liabilities.

 As others have mentioned a SMLLC does not have any impact on your taxes. 

There is no tax benefit from holding your rentals in any type of entitity really. 

And if you're an single member LLC you're actually not allowed to pay your self via a w2/ salary.

@Natalie Kolodij - my cpa advised me because my LLC is taxed like a S-Corp I can take a salary. Do you not agree with that? Wondering if I should get a new CPA. 

Originally posted by @Natalie Kolodij:
Originally posted by @Chris Seveney:

@Jonathon Weber

If you do an LLC (not an S Corp) there is no difference in between an owner draw vs paying a salary. An LLC profits flows down as ordinary income on your W-2. It makes no difference how you take it but your paying Uncle Sam.

there is a difference with an S Corp (that is more complex) but an LLC does nothing for tax purposes. LLC is used for asset protection not taxation.

When you run your real estate business through an LLC it allows you to pay yourself a reasonable salary and the remainder of the money you were paid (or technically your LLC was paid) you can distribute to yourself as an owner draw (also known as a distribution) (which is separate and distinct from your salary). The salary versus the owner draw distinction is the critical part of all of this.

Why you say? Because you ONLY pay self-employment tax on your net income (or net salary), and you do not pay self-employment tax on the money that you distribute to yourself as an owner draw. I know it sounds crazy, but that is what I am told. So effectively, by not paying self-employment tax on the owner draw component (versus the salary), you may end up saving significantly on your taxes.

A single member LLC is NOT allowed to take a salary.

An LLC profits do NOT flow down on a w2 in any situation.

If you're a partnership or an S corp your net profits show up on a form K-1, and if you're an S corp you must also take a reasonable salary, That is reported on a W2. 

An S corp should almost never be used for  rentals, and shouldn't really be being discussed in this thread. There was just some confusion earlier on. 


This was a lot of semi-incorrect information that's just going to further confuse people on this post unfortunately. 

Originally posted by @Chris Seveney :
@Natalie Kolodij - my cpa advised me because my LLC is taxed like a S-Corp I can take a salary. Do you not agree with that? Wondering if I should get a new CPA. 

Originally posted by @Natalie Kolodij:
Originally posted by @Chris Seveney:

@Jonathon Weber

If you do an LLC (not an S Corp) there is no difference in between an owner draw vs paying a salary. An LLC profits flows down as ordinary income on your W-2. It makes no difference how you take it but your paying Uncle Sam.

there is a difference with an S Corp (that is more complex) but an LLC does nothing for tax purposes. LLC is used for asset protection not taxation.

When you run your real estate business through an LLC it allows you to pay yourself a reasonable salary and the remainder of the money you were paid (or technically your LLC was paid) you can distribute to yourself as an owner draw (also known as a distribution) (which is separate and distinct from your salary). The salary versus the owner draw distinction is the critical part of all of this.

Why you say? Because you ONLY pay self-employment tax on your net income (or net salary), and you do not pay self-employment tax on the money that you distribute to yourself as an owner draw. I know it sounds crazy, but that is what I am told. So effectively, by not paying self-employment tax on the owner draw component (versus the salary), you may end up saving significantly on your taxes.

A single member LLC is NOT allowed to take a salary.

An LLC profits do NOT flow down on a w2 in any situation.

If you're a partnership or an S corp your net profits show up on a form K-1, and if you're an S corp you must also take a reasonable salary, That is reported on a W2. 

An S corp should almost never be used for  rentals, and shouldn't really be being discussed in this thread. There was just some confusion earlier on. 


This was a lot of semi-incorrect information that's just going to further confuse people on this post unfortunately. 

An S corp and "LLC" can not be used interchangeable as you did above.

An S corp is required to take a salary. 

An LLC that's not an S corp is disallowed from doing this.

This is why your post above created several points of information that don't read as accurate. While an S corp is an election to an LLC, when the majority of people use the term "LLC" it's just an LLC. No S election.

@Chris Seveney - once you have 2 years of rental income on your taxes it is treated the same as if you had that money on a W2 - Except that you are paying 15% more for the self employment tax.

I have not had a W2 since 2014 and have acquired 23 properties since then.  Never a problem using my rental income to qualify  

Originally posted by @Jonathon Weber :
Originally posted by @Jan Van der vorm:

I own a investment property that is 100%

Owned by my LLC after paying back the loan.

Now the property in Indianapolis is cash flowing $700 per month. Is this tax free?

It can be done but not easy to do. The smartest thing to do is have the money going to an LLC and paying yourself as an employee. That step alone decreases your tax liabilities.

You can't pay yourself as an employee just because you own your rental property in an LLC. For tax purposes it is no different than if the property was not in an LLC, accept you have extra cost associated with any extra LLC related paperwork.

I am also unclear why the original poster thought he didn't need to pay taxes on income? An LLC is not a tax shelter.

People reading this thread be careful because lots of mis-information. Talk to a licensed CPA. IRS does not accept ignorance of the law as a defense for breaking it.

Obviously my reference point for income and tax discussions is at a much higher level than most on here. For starters, since 2018, taxpayers with qualified business income (including rental income) are eligible to take a tax deduction up to 20% of their QBI. Determining whether or not you will be eligible to capture the full 20% deduction on your rental income will be based on your total taxable income for year. The taxable income thresholds are as follows:

Single filers: $157,500

Married filing joint: $315,000

"Total taxable income" is not your AGI (adjusted gross income) and it's not just income from your real estate business or self-employment activities. It's your total taxable income less some deductions. For example, let's assume you have three rental properties owned by an LLC and you net $50,000 in income from the LLC each year. But your wife is a lawyer that makes $350,000 per year. Your total taxable income for the year would be $400,000 landing you above the $315,000 threshold.

Below The Income Threshold

If your total taxable income is below the income thresholds listed above, the calculation is very easy. Take your total QBI and multiply it by 20% and that’s your tax deduction.

Above The Income Threshold

If your total taxable income is above the thresholds, the calculation gets more complex. If you exceed the income thresholds, your deduction is the LESSER of:

  1. 20% of QBI
  1. The GREATER OF:
  • 50% of W-2 wages paid to employees
  • 25% of W-2 wages paid to employees PLUS 2.5% of the unadjusted asset basis

The best way to explain the calculation is by using an example. Assume the following:

  • I bought a commercial building 3 years ago for $1,000,000
  • I have already captured $100,000 in depreciation on the building
  • After expenses, I net $150,000 in income each year
  • The LLC that owns the property has no employees
  • I’m married
  • I own a separate small business that makes $400,000 in income

Since I’m over the $315,000 total taxable income threshold for a married couple filing joint, I will calculate my deduction as follows:

The LESSER of:

  1. 20% of QBI = $30,000 ($150,000 x 20%)
  1. The GREATER of:
  • 50% of W-2 wage paid to employees = $0 (no employees)
  • 25% of W-2 wages page to employees plus 2.5% of unadjusted basis

(25% of wages = $0) + (2.5% of unadjusted basis = $25,000) = $25K

In this example, my deduction would be limited to $25,000. Here are a few special notes about the calculation listed above. the W-2 income of the property management company would not be included in the calculation for the QBI deduction.

Another special note, the 2.5% is based on unadjusted basis and it’s not reduced by depreciation. However, the tangible property has to be subject to depreciation on the last day of the year to be eligible for the deduction. Meaning, even though the 2.5% is not reduced for the amount of depreciation already taken on the property, the property must still be in the “depreciation period” on the last day of the year to be eligible for the QBI deduction.