Originally Posted by a3shu2
Looking for general advice on a unique real estate investment situation.
3 friends looking to buy investment houses separately to give on rent but to hire the same property manager to save on property management costs. Investment houses will be in a different city than where the friends live.
(1)What are the tax implications if we formed a multimember LLC?
(2)Heard of an option of using money from IRA to buy investment properties tax free. Any one has any do or dont advice for this option?
(1)What are the tax implications if we formed a multimember LLC?==> your MMLLC needs to use the form 8825 to report income and deductible expenses from rental real estate activities, including net income (loss) from rental real estate activities that flow through from you r MMLLC to Sch E of 1040, sch K1 of 1065 of each member and and each member?s 1040. Rental losses are always classified as "passive losses" for tax purposesUNLESS you are r/e pros. This greatly limits your ability to deduct them because passive losses can only be used to offset passive income. They can't be deducted from income you earn from a job or investments such as stock or savings accounts.
Passive income is the income you earn from rental real estate or other passive activities. An activity other than real estate is considered passive if you don't "materially participate" in it--that is, work at it for a minimum number of hours each year--usually 750 hours. Passive income does not include income from a job, a business you actively manage, or investment income. Thus, for example, you'd have passive income if you earn a profit from one or more rentals.
Without passive income, your rental losses become suspended losses you can't deduct until you have sufficient passive income in a future year or sell the property to an unrelated party. You may not be able to deduct such losses for years
So, If you own rental properties, one of the biggest advantages of your MMLLC is that it can help protect your personal assets while allowing you to reap some tax advantages. The LLC statutes vary by state, so it's important to research your home state specific laws and consult with a legal or an Enrolled Agent or CPA doing taxes in your local area to ensure that your interest in your LLC's property is secured. From a tax perspective, an MMLLC is classified as a ?pass-through? company. A ?Pass-through? means its income is passed through to its memers and claimed on those owners? individual tax returns of 1040s. Hence, it is subject only to capital gains rates on the ownership shares of the member, and not to corporate capital gains taxes, therefore there is no double taxation. So, since the MMLLC has more than one member, it can choose to be taxed as a partnership by filing form 1065. Again, the income and capital gains will pass through directly to the members.In either case, you can generally avoid many of the hassles of having a corporation, such as boards of directors, board and stockholder meetings, and elaborate corporate recordkeeping.An MMLLC can also choose to be taxed as an S or a C corp, if it meets the other requirements for these kinds of corps. Many people use S corps to reduce self-employment, Social Security and Medicare taxes.)An additional benefit of an MMLLC is that you can often reduce estate taxes by forming one and then giving your children a certain number of shares in it each year.
If you own more than one rental property, you might want to put each property into a separate MMLLC. That way, if there?s a problem with one property, your liability will be limited to your interest in that property, and you can protect your interest in the other properties.In some cases, you can reduce your administrative costs by setting up a single ?parent? LLC with many ?sub LLCs? that own individual properties.
(2)Heard of an option of using money from IRA to buy investment properties tax free. Any one has any do or dont advice for this option?===> You can buy /sell real estate in a self-directed IRA if you are in the flipping business, but there are limits on how many you can do per year. The profits on any transaction would be tax-deferred or tax-free and allow your IRA to continue to grow with those tax advantages; The real estate you buy must be a business property, not a personal residence, second home or occasional rental. Also, you can?t use your IRA to buy a property you already own; it has to be a new purchase directly into the IRA. Remember you usually can?t get a traditional mortgage loan in your IRA, so you really need to have enough money in your IRA to purchase properties for cash if you plan on having the property as a long-term rental. There are also costs to administering the IRA, so factor those into your calculations when penciling out any real estate investment. And you cannot write off losses or depreciation from any investment property in an IRA, so there won?t be the traditional tax savings you?d get on rental properties. Lastly, if you fail to comply with any of the rules, it may kill your IRA and cause you many tax penalties.