How would the management company be taxed? If sole proprietorship or partnership it will be subject to SE tax, and your contributions won't offset this income for SE purposes. Make sure you are actually coming out ahead tax wise. I'll admit not having any practical experience with returns with foreign income, not sure how the brackets all work with the foreign income exclusion.
If you want to have the property in a LLC, form a new one for the real estate. Having a LLC paying management fees to itself wouldn't fly.
These are exactly the issues my accountant and I were speaking about yesterday. After tax season is over for him, he will do the analysis for me in May or so. My logic/view at the outset is a bit too simple so I'm looking forward to him showing me the realities of the calculation.
In my oversimple thinking, I'm seeing the management company income as self-employed income which would get taxed with Medicare and Social Security (vs. on a Schedule E where the govt. does not get these funds).
As far as whether I'd come out ahead, this is where I'm uncertain and need my tax accountant to calculate this for me. For instance, starting with the benefit of a solo 401k, if after expenses are taken from the $74,400 USD rental income, let's say that I have 55k of income. Now, it's not clear to me when the SE tax comes into play. In my simple (and likely erroneous) thinking, if you could pay 18,500 into both my own and my spouse's 401k tax free, you're already at 37k worth of tax shelter. Presumably, the employer can also pay 25% of income (so here 12,500 USD), which should take the total pre-tax contribution of up to 49.5k (and if this 25% of income can also be payable to the spouse, then that would be another 12,500 that would could be paid but clearly the total would now be above the 55k of income.) From an IRS perspective, it would appear they are getting social security and medicare tax, and the money will get taxed when withdrawn from the 401k, so doesn't appear they are losing anything (likely getting more due to social security and medicare tax up front vs. no SS or Medicare tax on rental income).
Looking at the expenses, setting up an LLC, transferring property into it (?), running payroll (social security, medicare, federal, state, etc.) does this all outweigh the tax shelter on the 49.5k above? Not sure. Also, looking at this as a year over year model, where I continue to purchase real estate and rent it or sell it (I have a broker's license, and now would like to use it), does that turn the cost benefit into my favor over a period of X years? I am not sure.
I understand your point re: two LLCs. I think aside from the tax implications, this is the biggest hurdle for me to better understand, the idea of self-dealing. I have to say, so far my analysis has only taken me to the "disqualifed persons" requirement for a self-employed 401k appears to be a challenge, but the closer I look at it, it's more what you can or cannot do with the money that's already in the solo 401k.
In my simple model, if the renters pay the management company directly, perhaps that 's an avenue as the two parties are renter and management company. I think in the long run, this may be the best solution as it's becoming apparent that buying/selling and renting real estate (4 property purchases over the last few years, 3 rentals, and 2 sales, and growing) has the potential of becoming a business for us vs. rental income alone. My wife was an accountant, and the amount of time and effort she puts in to managing all of it is quite a bit, and for me all the searching for real estate, renters, P&S, getting renters, coordinating maintenance/repairs, improvements, advertising, research, etc. is also substantial.
I guess it boils down to when does the work surrounding buying/selling and renting real estate transfer from rental income to self employment?
I'll let you know how it goes - I'm very much relying on my tax accountant to correct my oversimplified thinking on the topic. Your first question still remains - how would the management company be taxed?