I don’t want to take any profit.

Rental Property Investor · Magnolia, MS · Member since 2019 · 15 posts · 5 votes

I have a few rentals and I owe what I consider a great deal of money on them. I have a good job and don't need the money honestly and the property's pay for them selves. I make a few hundred a month off then and I just want to keep all the money in the LLC and pay all the properties off before I reinvest it or use it in any way. So my question is if I use all the extra funds to pay off the properties and not pay my self will the irs take away my LLC? And are their any other downsides to doing this?

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Bob NortonPro Member

Accountant · Slidell, LA · Member since 2019 · 382 posts · 272 votes

@Ducote Kiernan @Joseph H. The IRS will not take your LLC away. It doesn't have that authority. An LLC is a legal entity in the State in which you create it. The State can revoke your LLC if you do not keep it in good standing by following the rules setup with the State, which is generally filing an annual report with the Sec of State and may include filing other documents.

As for taxes, if you are the sole member of the LLC, then the net income or loss from the property will be reported on your personal tax return on Schedule E. If you have a partner in the LLC, then you will be required to file a partnership tax return and your portion of the net income will be reported to the IRS and to you on a Schedule K-1 and you will report this income or loss on your Schedule E (page 2). You cannot chose whether or not to be taxed on your rental income. However, if you have a mortgage, then most likely in the early years you will show a rental loss due to the deduction of mortgage interest and depreciation. Whether or not you will be able to deduct your rental loss typically depends upon your adjusted gross income.

As for showing a loss for 5 years, the IRS still cannot revoke your LLC. If they can prove that the activity of your LLC is actually a hobby, then they will make you pay taxes on the gross income instead of the net income (since they will treat your expenses as unreimbursed business expenses which you can no longer deduct under the new law). However, the hobby rules do not apply to rental real estate, since it is considered an investment under the tax law. Additionally, the hobby rules are more complicated than this and if the taxpayer can show that they have a plan to make a profit and have taken actions to achieve this plan, then the IRS may have a hard time proving that the activity is only a hobby. I would argue that setting up an LLC is one part of the business plan with an intention to generate a profit.

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Mike Dorneman
Rental Property Investor · Drums, PA · Member since 2017 · 345 posts · 365 votes
6y
@Ducote Kiernan I am not an account or an attorney.
I would connect with your accountant and look into moving your portfolio into a trust. If you truly have no need for the gains and wish to limit your tax exposure, this could be a viable option. Even if you don't "pay yourself" through tour LLC, you'll likely still show gains which will be taxed from the LLC perspective.
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Ducote Kiernan
OP
Rental Property Investor · Magnolia, MS · Member since 2019 · 15 posts · 5 votes
6y
@Mike Dorneman thank you
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
6y
@Ducote Kiernan It doesn’t matter if the properties are in an llc, or in your personal name.....the taxes are the same and it doesn’t matter what you do with the extra money, you get taxed on whatever the taxable gain is from the property. The irs won’t “take away” your llc for any reason.
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Joseph H.
Kansas City, MO · Member since 2018 · 91 posts · 30 votes
6y
@Wayne Brooks I was told by another investor the LLC is revoked if you don't show any profits for 5 years. This keeps people from using an LLC to hide or pay money to the IRS by continuously losing a profit. That is what I was told and don't have any experience or legal capacity to back it up. @Ducote Kiernan as far as taking less money for taxes, you could lower your rent and take less profit which would help solve some of your tax problem.
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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
6y
You are probably still showing profits. Profits doesn’t equal cashflow.

You can have profits with no cashflow. Even the amount going towards principe is profit.

Take rental income minus interest, taxes, insurance and any repairs, and the magical depreciation and the balance is profit. If you have a loan this number may be higher than cashflow. I have a negative $9k/year cash flow property that makes $9k profit before depreciation. (Which then makes for a $7k paper loss.)

I think the story you heard was about businesses being turned in to “hobbies” by the irs. I had a friend who wrote off every expense with his “business” of motorcycle racing until after 5 years he had zero winnings and it became a hobby. But he saved 10’s of thousands in taxes until then.
Ps. He specifically went with H&R Block and their audit protection for a few extra bucks that promised to reimburse and invalidated deductions just to be safe.
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Dan V.
Real Estate Consultant · Norfolk, VA · Member since 2017 · 345 posts · 201 votes
6y
@Ducote Kiernan You will pay tax on the LLC's net income (income less expenses including depreciation/amortization) not on the amount you pay yourself. Before you pay off extra on the loan, make sure you have a good amount of reserves for repair, capex (major repairs, upgrade), turnover expenses, taxes, etc. Paying extra will lower your interest expense (less tax deduction) and higher equity properties are more target to lawsuits (mortgage can be good protection too).
Talk to your accountant about what your goals are so he can align the best strategy for you.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
6y
@Ducote Kiernan

An LLC is just an entity that holds the property.
You have the right to pay off the mortgage or to take a distribution.

You are taxed as the LLC earns the income; not necessarily when the LLC makes a distribution to yourself.

Paying off the mortgage results in less of an outstanding balance and a decrease in deductible mortgage interest which can increase your income.
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Bob NortonPro Member
Accountant · Slidell, LA · Member since 2019 · 382 posts · 272 votes
6y
@Ducote Kiernan @Joseph H. The IRS will not take your LLC away. It doesn't have that authority. An LLC is a legal entity in the State in which you create it. The State can revoke your LLC if you do not keep it in good standing by following the rules setup with the State, which is generally filing an annual report with the Sec of State and may include filing other documents.

As for taxes, if you are the sole member of the LLC, then the net income or loss from the property will be reported on your personal tax return on Schedule E. If you have a partner in the LLC, then you will be required to file a partnership tax return and your portion of the net income will be reported to the IRS and to you on a Schedule K-1 and you will report this income or loss on your Schedule E (page 2). You cannot chose whether or not to be taxed on your rental income. However, if you have a mortgage, then most likely in the early years you will show a rental loss due to the deduction of mortgage interest and depreciation. Whether or not you will be able to deduct your rental loss typically depends upon your adjusted gross income.

As for showing a loss for 5 years, the IRS still cannot revoke your LLC. If they can prove that the activity of your LLC is actually a hobby, then they will make you pay taxes on the gross income instead of the net income (since they will treat your expenses as unreimbursed business expenses which you can no longer deduct under the new law). However, the hobby rules do not apply to rental real estate, since it is considered an investment under the tax law. Additionally, the hobby rules are more complicated than this and if the taxpayer can show that they have a plan to make a profit and have taken actions to achieve this plan, then the IRS may have a hard time proving that the activity is only a hobby. I would argue that setting up an LLC is one part of the business plan with an intention to generate a profit.
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