All Forum Posts by: Account Closed

Thank you @David M. and @Steve Vaughan. I'm understanding the structure now.

Thank you @David M. I think that answers the (1), (2), (3) question. My goal would be to have 100% of the income taxed as passive rental income; I do not want to convert some of it to ordinary income. I was just not sure of the internal logistics of how to manage the payments once they're in the management LLC's account.

To the question of scaling it later, let's say I own the following properties:

• House Hack Duplex 1 (owned/mortgaged personally)
• House Hack Duplex 2 (owned/mortgaged personally)
• Apartment Building 1 (owned/mortgaged by my single-member LLC 123 Main Street, LLC)

In this scenario, assuming that my same management LLC has contracts to manage each property, Property Management, LLC would collect the rent for each property, then Property Management, LLC would transfer the rent from House Hack Duplex 1 and House Hack Duplex 2 to me personally, but it would transfer the rent from Apartment Building 1 first to 123 Main Street, LLC, then I can take an owner's draw from 123 Main Street, LLC's bank account once the funds are in there? Am I understanding that correctly?

In the situation where I use an S-Corp or C-Corp as the management entity, it is my understanding that only the amount collected as a "management fee" becomes ordinary income, correct? The amount that I transfer to myself as the "rent" portion is still passive rental income on Schedule E? From this amount I'd have to pay myself a reasonable salary and take the rest as a distribution. Do I understand correctly that a C-Corp does not have the "reasonable salary" requirement? Doing the Corp. route seems to give me more control over how I want income to be reported. If the management fee is low, then I am converting hardly any of the income to ordinary.

Thank you, @David M. I looked at the other threads to which you linked here. I appreciate the additional info, but it does not apply to my situation. I know that if I hold the title/mortgage in my personal name, transferring title alone to an LLC (while continuing to hold mortgage personally) is utterly pointless because it will pierce the corporate veil. I am not intending to do that.

Rather, my question was regarding the financial logistics if I hold the property/mortgage personally, but contract with my management LLC to manage the property (i.e., advertise, collect rent, etc).

Let's say I have a duplex wherein both the property and the mortgage are owned by me personally. I draw up a contract with my single-member LLC (Property Management, LLC) to manage the property for me. This obviously changes nothing regarding the title or mortgage; they're still owned by me personally. However, it is now Property Management, LLC that is dealing with and leasing to the tenant, collecting rent, hiring contractors, etc.

Property Management, LLC collects $2,000 a month in rent. Should Property Management, LLC then transfer that $2,000 straight to me personally as an owner's draw? Or should Property Management, LLC retain some kind of "management fee" for itself so that the management agreement is more legitimate?

My question above was simply: does it make a difference either way? Will the entire $2,000 flow through to my Schedule E as rental income regardless of whether I 1) leave it sit in Property Management, LLC's bank account all year; 2) transfer the entire $2,000 to my personal bank account every month as rental income; or 3) transfer some portion of the $2,000 to my personal bank account every month as rental income (say, $1,800) and retain a portion for Property Management, LLC as a management fee? The question is: does it make a difference for tax purposes whether one does option (1), (2), or (3)? Or does the income show up on one's Schedule E as $2,000 in rental income regardless of the internal transfers?

I think if Property Management, LLC were an S-Corp or C-Corp it would change the dynamics, but the question is for an LLC, which are disregarded by the IRS. If you are familiar with how it would be structured as an S-Corp or C-Corp, I'd be interested to compare.

Thank you, Greg.

In terms of the accounting logistics, does the management LLC have to write a check to me for disbursement of the rental income or does any income the LLC has from collecting rent just flow through to my schedule E either way?

For instance, let's say the management LLC collects $2,000 per month in rent. Does the LLC have to withhold a fee for "property management" and then disburse the difference (say, $1,800) to me personally as rent? Or can the LLC just report the entire $2,000 on my tax return as rental income, even though the LLC itself does not own the asset being rented?

I am interested in getting into rental investments via house hacking. My eventual goal is to own a portfolio of properties outside of my personal residence, but the first two properties I buy will likely be house hack duplexes to get the ball rolling with low down payments.

I understand that in house hacking and FHA loans, I will need to own the property in my own name. I understand the implications of that--not a problem. My question here is whether it's worthwhile to establish an LLC to manage (but not own) my house hack(s).

I want to do this for a few primary reasons. First, I want to have some separation between myself and my tenant. Presenting the property for rent from Property Management, LLC allows me to hold myself out as the "property manager" who happens to live next door rather than the owner of the building that lives on-site. I know there is no legitimate legal separation here since the property would be titled in my name, but it does provide a bit of social distance between myself and my tenant. The tenant's lease would say Property Management, LLC, not my own name, which would mitigate some social awkwardness of the tenant knowing that I am also the owner of the property.

Likewise, if Property Management, LLC is the entity collecting rent and dealing with the tenant, it may provide asset protection benefits in addition to the privacy benefits. If a tenant sues Property Management, LLC, but not myself personally, Property Management, LLC would have very few assets. I know any competent lawyer would search and see that I own the property, but you never know. This is a marginal benefit that gives the outward appearance of separation.

Finally, the last reason I am interested in doing this is to scale it later. My goal is to buy probably two house hack duplexes, then move into a single family residence and keep the two duplexes on the side. I will then scale up my rental portfolio over time with rental properties that will be owned in (most likely) a series LLC. Once I am able, the two original duplexes will also be moved into the series LLC. However, all the while, the properties (both the house hacks and any new investment properties) will be managed by the same Property Management, LLC. No matter if the properties are re-titled, owned by me personally, or owned by a series LLC I control, they all appear the same to my tenants: "Managed by Property Management, LLC." This allows Property Management, LLC to establish brand equity as a landlord from my very first house hack, and it also simplifies some of the accounting / rent collection / etc since I will, for a time, have some properties owned by me personally and some not, but they will all be managed by the same management LLC.

Has anyone pursued this strategy? Is it worthwhile? Keep in mind my intentions to scale later into a more robust network of rentals. The house hacking component will be only the first ~6 years or so. After that I will stop house hacking and start buying rental units with investment property mortgages rather than FHA loans.

Scott,

In this example, would it be necessary for "Traditional LLC" to distribute money to each series? Or would any net profits realized by Traditional LLC just become rental income on the person's Schedule E, assuming that both Traditional LLC and the Series LLC are all 100% owned by the same single member?

For example, let's say my name is Jim Smith and I have a series LLC with three series that each hold one property:

• Jim's Real Property, LLC
  • 123 Main Street, LLC
  • 456 Second Avenue, LLC
  • 789 Third Way, LLC

Then I also have what you have been calling a "Traditional LLC" outside of the series that collects rent, pays the bills, etc. Let's call it Jim's Management, LLC.

If Jim's Management, LLC, collects a total of $5,000 a month in rent from the three properties contained in Jim's Real Property, LLC, does Jim's Management, LLC, then have to turn around and distribute that rent back to 123 Main Street, LLC, 456 Second Avenue, LLC, etc, or can Jim's Management, LLC, just use those proceeds as it sees fit to pay for a new roof on the house at 123 Main Street, pay the property tax bill at 456 Second Avenue, distribute some of the money to Jim Smith's personal account, etc?

In the end if all single-member LLCs are fungible disregarded entities in the eyes of the IRS, does it matter which one is ultimately "reporting" the rental income on Jim Smith's 1040? Is there any danger here in mixing funds?

If it's completely fine for Jim's Management, LLC, to operate in this fashion, is it even necessary for 123 Main Street, LLC, 456 Second Avenue, LLC, etc, to have their own bank accounts at all? The only thing those entities would be doing in that scenario is owning a single property. They wouldn't have to cash or write any checks themselves because Jim's Management, LLC, is doing it all.

I hope I'm understanding your example correctly. Please let me know if I am missing something.