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Investment Property in LLC's, but what about Property Searching?

Discussion in 'Asset Protection/Taxes/Legal' started by Corrado79, Feb 21, 2008.

  1. Corrado79
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    Corrado79 New Contributor

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    I currently have a couple of investment properties in different states, each owned with their own separate single-member LLC's. The single member is me as an individual.

    I deduct my costs related to those LLC's directly from the income on their own Schedule E's. But I also have costs that are not exactly related to either one of the properties (e.g. costs related to my search for additional properties). I've heard some people using another, separate "miscellaneous" Schedule E to capture those costs.

    Would it be preferable to set up an S-Corp to capture the costs of my active property searching?

    Thanks in advance! :cheers:
     
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  2. andviv
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    andviv Gold Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass Summit Attendee

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    Re: Investment Property in LLC's, but what about Property Searchi

    bump
    This is something of interest for me as well, so I am subscribing to this thread.
     
  3. SteveO
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    SteveO Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    Re: Investment Property in LLC's, but what about Property Searchi

    I have another LLC that is used for capturing expenses. I also use it for making offers on properties with the intention of assigning it to another LLC prior to closing. My accountant has told me that I need to figure out a way to generate income for this LLC. Not sure why though.
     
  4. Sid23
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    Sid23 Bronze Contributor

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    Re: Investment Property in LLC's, but what about Property Searchi

    Could you have the construction management fees flow to that LLC for income purposes? We have the property LLC hire our "main" LLC to do construction management or development services on all our deals.
     
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  5. bflbob
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    bflbob Bronze Contributor Read Millionaire Fastlane Speedway Pass

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    Re: Investment Property in LLC's, but what about Property Searchi

    My CPA uses Form 1065 to file for my LLC.

    Page 1 includes most of my activities related to searching/analyzing properties.
    Expenses in that section include:
    • Office Equipment Depreciation
    • Bank Fees
    • Advertising
    • Books, Dues & Subscriptions
    • Internet/Website
    • Legal/Professional
    • Licenses & Fees
    • Office Expense
    • Postage
    • Seminars
    • Supplies
    • Telephone
    • Charity

    My only income is a Management Fee that passes from my rentals.

    All this passes through as Ordinary Income (Loss).

    She then attaches a Form 8825 for income and expenses related directly to the rental properties. One of the expenses is the Management Fee that passes to page 1 of Form 1065.

    The Form 8825 passes through as Passive Income (Loss).
     
  6. SteveO
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    SteveO Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    Re: Investment Property in LLC's, but what about Property Searchi

    Speed +++ for Bobbo
     
  7. SteveO
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    SteveO Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    Re: Investment Property in LLC's, but what about Property Searchi

    I don't have any construction management but it seems that some of the income could be passed through for management duties.
     
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  8. bflbob
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    bflbob Bronze Contributor Read Millionaire Fastlane Speedway Pass

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    Re: Investment Property in LLC's, but what about Property Searchi

    Oh...you're too kind.:blush:
     
  9. Corrado79
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    Re: Investment Property in LLC's, but what about Property Searchi

    Thanks Bob. Rep+++.
     
  10. April
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    Re: Investment Property in LLC's, but what about Property Searchi

    an llc or lp is used usually for protection and a corp is used for tax reduction so it would be a good idea to have a corp entity umbrella over your properties to manage them, at a cost of course, them you can utilize deducting more expenses through your corp

    So if you have a corp managed llc or lp you could have deductions with the llc and even more from the corp that can not be utilized by the llc/lp
     
  11. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    Re: Investment Property in LLC's, but what about Property Searchi

    I'd add one more piece of detail to BFLBob's great post. Make sure you're taking the election to aggregate for material participation (assuming you are). OTHERWISE, you will need to have 500 hours on EACH property to qualify to take the deduction.

    Here's a little more detail, just in case anyone besides me cares...

    In order to take a deduction of real estate loss against other income, there are two tests: (1) you have to materially participate in the property (500 hours per year) and (2) have income less than $100K for $25K of real estate loss (loss phases out from $100K - $150K) UNLESS you are a real estate professional.

    People get excited about the real estate professional part of the tax loophole, but forget about the material participation. If you don't make the election to aggregate and qualify once (and yes, you have to make an affirmative election and attach it to your tax return) then it is assumed that you have 500 hours on EACH property.

    Sometimes you might want to NOT make the election. Let's say you have a very passive investment (as a limited partner in someone else's deal, for example) that gives you passive income. In that case, you might want a passive loss to offset it. In this case, the passive income/loss is truly passive, and you're not materially participating.

    Hmmm....upon re-reading this post I think it should come with an advisory to not have a drink before you attempt to read it.

    Let me know if I've confused the issue completely and I'll see if I can sort it out.
     
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  12. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    Re: Investment Property in LLC's, but what about Property Searchi

    And, in answer to the first question, at some point with my clients who have lots of properties, we always set up an LLC taxed as an S Corp (or C Corp) to be a management company. Otherwise, if you have a client with 100 properties (and some of mine do have that many) you'll go crazy dividing up the depreciation on the copier by 100, meals expense by 100, etc etc.... With LLC-S, you can just take all your deductions right there.

    We charge back a mgmt fee percentage of income to each of the properties to get around the issue that SteveO mentioned - deductions with no income.
     
  13. Corrado79
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    Corrado79 New Contributor

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    Re: Investment Property in LLC's, but what about Property Searchi

    Great info Diane! I've never heard of "material participation." Does the $100k of income for $25k RE loss rule extend out? I.e. if you have $300k of income, can you have $75k of RE loses?
     
  14. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    Re: Investment Property in LLC's, but what about Property Searchi

    Nope, it actually goes the other way (more income = less deduction)...

    Here's some more detail:

    If your adjusted gross income (AGI) is less than $100,000, you can deduct up to $25,000 per year in RE losses against that income. This benefit phases out (incrementally drops from $25,000 to $0) if your AGI is between $100,000 and $150,000. And if your AGI is over $150,000, you don’t get to take any RE losses in that year.

    That said, any losses can be “carried over” and used in subsequent years, based on the same income criteria.

    The benefit to declaring “Real Estate Professional” status is that all real estate losses can be claimed against income in that year, without limitation based on income. So, if a part time investor (who makes less than $100,000 per year) racks up $75,000 in real estate losses in 2008, he can deduct $25,000 of those losses in each of 2008, 2009, and 2010. If he continues to rack up losses in 2009, 2010, etc, those losses will also have to be carried forward. In contrast, a Real Estate Professional in the same situation can deduct the full $75,000 against AGI in 2008, and can do so with the additional losses in subsequent years.

    So, if you have $300,000 in income, your $75,000 in losses can't be used at all in that year. But, if in subsequent years your income drops below $100,000, you can start using those $75,000 in credits.
     
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  15. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    Re: Investment Property in LLC's, but what about Property Searchi

    At $150K of income, you've lost all of your losses. The amount of loss phases between $100K - $150K.

    The exception is if you're a real estate professional. Then you can take 100% of the loss against income, no matter how much income or how much loss.

    (Again provided you're materially participating in the properties)
     
  16. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    Re: Investment Property in LLC's, but what about Property Searchi

    Oops posted too soon.

    Ditto on JScott.
     
  17. bflbob
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    bflbob Bronze Contributor Read Millionaire Fastlane Speedway Pass

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    Re: Investment Property in LLC's, but what about Property Searchi

    OMG!

    I just checked my return from last year, and see that I didn't ever check the material participation box (TurboTax). Looks like I'll need to file an amended return.

    I remember passing by it because there were several tests that you could use to pass the test. As I recall, you were materially participating if:
    • You spent over 500 hours on the business, or
    • You spent over 100 hours on the business, and no one else spent more time, or
    • You spent between 200 and 203.5 hours and weren't excluded due to 203.3(1)[a]%%14.6PP7 of the Internal Revenue code, or
    • You lied.
    It all got very confusing to me, so I passed by, and intended to come back to it. Totally forgot it until now.

    Any chance you can clarify for me Diane?

    PS: It also seemed like there was a rule about not being able to be a material participant this year if you weren't one last year. Am I right?

    Ref: http://www.irs.gov/businesses/small/article/0,,id=146843,00.html
    http://www.aicpa.org/pubs/jofa/feb2008/real_estate.htm
    http://www.howtoinvestingozone.com/depreciation.html <-- 7 rules
     
    Last edited: Feb 24, 2008
  18. Corrado79
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    Corrado79 New Contributor

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    Re: Investment Property in LLC's, but what about Property Searchi

    Quick ? --- Does this method still work if we're talking about single-member LLC's?
     
  19. Corrado79
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    Corrado79 New Contributor

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    Re: Investment Property in LLC's, but what about Property Searchi

    Makes complete sense. Thank you!

    Now I need to find a way to qualify for real estate professional status, despite being W2'd in another, seemingly unrelated industry. :smx3:

    How exactly is "real estate professional" defined? Also, can your real estate profession be totally unrelated to your property investing?
     
  20. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    Re: Investment Property in LLC's, but what about Property Searchi

    This has a bit of info:

    http://www.taxalmanac.org/index.php/Real_Estate_Professional

    "A real property trade or business: develops, redevelops, constructs, reconstructs, acquires, converts, rents, leases, operates, manages, or brokers real property"
     
  21. taichijedi
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    taichijedi Contributor Read Millionaire Fastlane

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    Re: Investment Property in LLC's, but what about Property Searchi

    This is one of the most informative threads I have ever read!!!! Thank you all so much for the fantastic info. It is really helping me get my bearings in orchestrating my launch into the fastlane. Speed +++ to Diane, BoB, SteveO Corronado and JScott!!!

    As an aside, how many LLCs should one have before an umbrella corp needs to be considered?
     
  22. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    Re: Investment Property in LLC's, but what about Property Searchi

    Diane,

    Just to make sure I understand this correctly...

    Is it 500 hours per year to qualify for Real Estate Professional status? Or 750 hours?

    I'm guessing this is actually going to make the difference for me this year... :)


    Jason
     
  23. Corrado79
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    Corrado79 New Contributor

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    Re: Investment Property in LLC's, but what about Property Searchi

    Thanks man. This forum is a fantastic source for quick snippets of important information.
     
  24. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    Re: Investment Property in LLC's, but what about Property Searchi

    Hi Jason

    There are actually two tests. (1) You need to materially participate in the property. That's defined as 500 hours per year. If you file the election to aggregate, then it's just 500 hours total.

    If you meet just this test, then you're subject to the $25K loss if AGI is less than $100K, etc...

    Second test is whether the loss is fully deductible against income if loss is higher than $25K and/or income is higher than $150K - that's the real estate professional test.

    Jason, without going into your personal situation too much, remember you also have to spend more hours in real estate activities than your other job. So, it's not just 750 hours for real estate professional. If you spend 2000 hours at your other job, you'll need to spend at least 2001 hours in real estate.
     
  25. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    Re: Investment Property in LLC's, but what about Property Searchi

    Got it, thanks Diane...

    As for you last comment, I expect that second half of this year won't include any other hours at other jobs... :)
     

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