If you create an LLC that owns a rental property, you have access to tax write offs that will, in the IRS’s eyes, show massive losses. You get to depreciate the property, which is a big one, you get to put any expenses associated with the business on there - tax guy, cell phone, internet, car, some of your gas, some of your meals. Talk about business at dinner? It’s a write off /business expense. Swing by the property on your way home from your 9-5, it’s a business excursion, so gas is a write off. Do some maintenance on the property? You’ll need a vehicle to get there - write off.
All of these expenses will far outweigh the rental income you pull, so your LLC in massively in the red. Because of the structure of LLCs, that starts chipping away at your tax bracket, so you pay less in taxes. If you pull 150k salary, you get 60k pulled out of your check for taxes, etc. But your LLC loses 30k in depreciation, and another 24k in business expenses while only profiting 10k in rental income on the year, you’ve lost 44k in your business, so your total earnings drop to 106k. That ends up with a 30k refund from the gov.
Disclaimer - this is new to me, and I’m figuring it out as I go along. This is my understanding of how it works as of this point - after countless hours of research and conversations with those doing it.
Edit to add some links:
https://www.stessa.com/blog/tax-benefits-of-owning-rental-property/
https://pinefinancialgroup.com/blog/7-tax-benefits-of-rental-property-landlords-should-know-about/
https://realwealth.com/learn/top-10-tax-benefits-of-owning-rental-property/
All those deductions are great until you realize that 40% capital gains tax on a house that’s appreciated by $300k, which you wouldn’t have to pay if you’d been living in it instead of renting it.
What you’re talking about with the LLC for generating write-offs can be done with any aspect of your life, being a slumlord doesn’t have to come into play. Your corporation can literally be a holdings company. It just owns whatever you would otherwise own, and any expense related to those assets becomes deductible. You could go out to dinner with your brother and talk about how maybe you might buy another house next year, business expense. You would have to write up expectations reports every year, to prove how your business is planning to use those assets to grow, but businesses fall short of earnings expectations all the time
Capital gains are deferred, and can be avoided in a …what is it, 509c transfer upon selling the property to buy new ones.
Yeah that’s great, if you plan on never realizing the actual gain from your investment. Idk why anyone would deal with the headache of tenants and vacancies and maintenance/repairs on a rental property that just barely gets the mortgage covered if they didn’t plan on earning the actual profit that comes in the end, but you do you
(post is archived)