How to qualify for the pass-through tax deduction

Question

Hello! My husband and I are about to rent out our first single family home (which we currently live in), and was hoping to get some help here. We just created our LLC to help get the pass through deduction next year (besides the benefit of protecting our asset). Does anyone know if in order to get the business tax benefits, our LLC has to be in the lease name and all payments have to go through the business bank account? Or can it be my own within I own the LLC? Hoping to get some clarification here. Thank you in advance!

Bill B. · Answer

Try looking at an umbrella insurance policy. You are 10x more likely to get sued for something you do than your something your rental property causes that you aren’t also responsible for. If you’re in a car wreck, if you allow an uninsured worker to work on your rental property or your home, etc etc. Almost every way your rental property could hurt someone would be because of a mistake you made. That means you can be sued, that means you could lose anything you own. Even 5 rentals in 5 different llc’s.

Keaton Frieberg · Answer

Make sure to keep up with the LLC corporate formalities such as pay Texas franchise taxes, maintain a separate bank account, keep minutes of meetings, and conduct business in the name of the LLC when appropriate . Also, be sure that if you created an LLC for asset protection purposes (which most everyone does) that you include asset protection language in your operating agreement. If you plan to acquire multiple properties, the series LLC is a real estate investor's best friend as it allows the investor the ability to compartmentalize each property into its own series or "cell" thus insulating each property from potential liability.

Sofia De Santos · Answer

Thanks so much for the insight, Michael! One last question to that. In Texas, if we were to get sued by our tenant in our rental property that is under our LLC, could the house under the LLC still be subject to being taken away from us in worst case scenario? I am understanding that the house is still an asset at stake even if under an LLC. So what is the major benefit of the LLC?

Michael Hill · Answer

Hi @Sofia De Santos, If you plan on transferring the title of the home into your new LLC, then the lease should be in the name of the LLC. You should also have payments and any other financial transaction related to the property go through a business bank account that is also in the name of the LLC. This is necessary for you to enjoy the liability protection that the LLC offers. It will also make it much easier to track all expenses and payments if you have a bank account dedicated to the LLC, making it easier when you file your taxes at the end of the year.

Eddie L. · Answer

***Not a CPA and no filing tax return experience for others***

Pass through entities such as a single member LLC are typically disregarded for tax purposes. This just means that the IRS treats it as nonexistent and everything it owns is really owned by the taxpayer directly. From a tax standpoint, I don't think it matters. From an asset protection standpoint, you'd want a clear separation of entities being yourself and the LLC so yes it would be beneficial to have all business matters going through the LLC in general. Also I assume you're referring to the IRC §199A/Qualified Business Income Deduction. LLC isn't the only pass through entity that qualifies. Sole proprietorship would qualify just as well and you would've saved on the cost of setting up and maintaining the LLC.

https://www.law.cornell.edu/us...

How to qualify for the pass-through tax deduction

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