Purchasing investment property with LLC income

[John]

I am the 100% owner of an LLC that owns and operates several websites. The LLC is setup as a passthrough entity, and has fairly large profits each year which are reported on my personal schedule C as business profit.

I'm interested in buying some investment properties. Instead of taking the profits from my LLC, paying taxes on them, then buying the properties with what's left, is there a legal way to have the LLC buy and hold the properties, making the purchase price a business expense which would lower my LLC's overall taxable income?

What I'm considering is turning "John's Internet Company, LLC" into "John's Internet and Real Estate Investment Company, LLC." Then, the profits from the websites would be used to purchase, operate, and maintain the properties. Is this advisable? Legal?

 

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[Jill]

Anxious to hear any answers from resident experts (Diane??) since I am in a similar situation. I think I might've seen a sub-forum for business structure question or such, but need to go look again. Such an amazing wealth of new stuff to read here!! Love this place.

Difference for me is that I incorporated my software consulting business. So I'm assuming that I will have to pay taxes on whatever is left-over, PRIOR to making any Real Estate investments. I've been planning to call one of Diane Kennedy's experts for months now. Guess it's about that time, eh?

 

[Diane Kennedy]

Just saw this...and don't have time for a thorough response.

Here are the issues:

(1) Buying property is buying an asset. It's not immediately a deduction. You do get depreciation, though, which often creates a paper loss. Just don't figure on it being dollar for dollar (you buy a property for $100,000 cash, you don't have a $100,000 deduction - just the depreciation and other expenses against the income of the property)

(2) You are limited in the amount of real estate loss you can take against other income. If you make less than $100K, you can only deduct $25,000 of the loss. Over $150K, you can't take any.

(3) Exception to (2) above is real estate professional status HOWEVER IRS is challenging this classification very aggressively. Be prepared for an audit if you go this route.

(4) Even if you're okay with an IRS audit and decide to go this route, if you're subject to AMT, it won't work.

My solution? I would completely LEGALLY opt-out with new website ventures by using your pension money to own them. Just like with real estate, you can use pension money to invest in new businesses.

For existing businesses, max out your pension deductions for deductions.

BTW, this is completely different advice than I would have given 3 years ago. That's because the tax climate has changed so much.

 

[John]

Thanks a lot for taking the time to reply. rep++

I had never considered having our retirement accounts own website businesses. I've heard of owning real estate through retirement accounts, but never websites. I'm very interested in this and am going to check it out. My wife and I have been socking away $45k each per year in our SEPs, so it would be nice to put that money to work!

 

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