Author Topic: Can you be a landlord as a sole-proprietorship business?  (Read 5383 times)

headwinds

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Can you be a landlord as a sole-proprietorship business?
« on: January 22, 2017, 12:49:28 AM »
For example, could I start a sole-proprietor company that does nothing but buy cheap houses and rent them out? Just curious.

SeattleCPA

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #1 on: January 22, 2017, 07:58:58 AM »
I'm not sure I understand your question...

If it's, "can I buy cheap houses and rent them out?"... answer is yes.

If it's "is the activity of renting houses considered an active trade or business?"... I think the answer is usually no (at least for federal income tax purposes) because real estate is usually by definition a passive activity.

headwinds

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #2 on: January 22, 2017, 09:41:48 AM »
Thank you for the answer. My train of thought is this: I have no 401k at work, I have a 457. Which means I can still contribute to a 401k if I can somehow become eligible for one. The easiest way seems to be to start my own business and have a solo 401k, because i dont really want to have two full time jobs. So I'm trying to figure out what I can do which can make me up to $18000 profit/yr (for the contribution limit) that would qualify as a business in order to qualify for the solo 401k. Does that make a little more sense?

Sonos

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #3 on: January 22, 2017, 10:12:31 AM »
I am not a tax expert, but I think that only earned income is eligible for tax advantages accounts. Your rental income is not considered earned income. However, if you somehow get it to qualify as earned income, you'd then have to pay and the 15% self employment tax on that money. This thread discusses the topic as well: http://forum.mrmoneymustache.com/real-estate-and-landlording/solo-401k-for-rental-income/

Overall, I'd suggest you talk to a CPA.

Sonos

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #4 on: January 22, 2017, 10:13:36 AM »
Also, check out BiggerPockets.com, they probably have information on this very question.

Letj

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #5 on: January 22, 2017, 12:35:57 PM »
I own a lot of real estate and there's nothing passive about it. My husband does a lot of the maintenance and I do the paperwork and showings most of time. Even so, it's still considered passive. I too wanted to see if I can set up a solo 401K if I quit my day job to shelter some income but from the research I did, it wasn't allowed for rental activity since it's considered passive income.

headwinds

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #6 on: January 22, 2017, 01:33:55 PM »
Thanks guys, that's a bummer that it doesn't work that way, but good to know.

maizeman

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #7 on: January 22, 2017, 01:47:52 PM »
I'm sure you've already checked, but make sure your employer doesn't also offer a 403b plan. Even if they're at the same employer you can contribute $18k each into a 403b and a 457.

(Although the 403b and the 401k share a common $18k contribution limit, so even with multiple jobs you don't get to triple dip.)

tralfamadorian

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #8 on: January 22, 2017, 02:01:20 PM »
For example, could I start a sole-proprietor company that does nothing but buy cheap houses and rent them out? Just curious.

If you have a spouse that does not work full time, he or she can qualify as a real estate professional in the eyes of the IRS and run the rental business. 

There's a lot more to it but this is a common decision for couples that own significant real estate assets and one spouse is not currently employed full time but would like to be the real estate lead in the family. 

okobrien

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #9 on: January 22, 2017, 02:37:11 PM »
OP, are you already maxing out the 457 or are you avoiding it? This wasn't clear to me.  I ask because I am a huge fan of the 457 and used it primarily when I had a job.

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SeattleCPA

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #10 on: January 22, 2017, 03:57:52 PM »
Thanks guys, that's a bummer that it doesn't work that way, but good to know.

You know, you can use real estate just like you use an IRA or 401(k)... More detail here:

http://evergreensmallbusiness.com/real-estate-vs-ira-and-401k-accounts-part-i/

Also, I hesitate to share this because I'm not sure it really works, but I've seen other practitioners set up an S corporation for a landlord to run a property management business through... the landlord or the landlord's spouse gets paid a wage for being a property manager. That wage supports a solo 401(k).

Just to be clear, I'm not saying that works. I haven't researched it. It also seems like too much work for dubious benefit. But now you know about it...

headwinds

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #11 on: January 23, 2017, 12:47:03 AM »
I'm sure you've already checked, but make sure your employer doesn't also offer a 403b plan. Even if they're at the same employer you can contribute $18k each into a 403b and a 457.

(Although the 403b and the 401k share a common $18k contribution limit, so even with multiple jobs you don't get to triple dip.)

They don't offer a 403(b). They offer a pension and a 457. I was under the impression that they can't offer another retirement option as they already have the pension and 457, though I could be wrong. I hope I'm wrong.

headwinds

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #12 on: January 23, 2017, 12:47:34 AM »


If you have a spouse that does not work full time, he or she can qualify as a real estate professional in the eyes of the IRS and run the rental business. 

There's a lot more to it but this is a common decision for couples that own significant real estate assets and one spouse is not currently employed full time but would like to be the real estate lead in the family.

We will both be working full time

headwinds

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #13 on: January 23, 2017, 12:48:33 AM »
OP, are you already maxing out the 457 or are you avoiding it? This wasn't clear to me.  I ask because I am a huge fan of the 457 and used it primarily when I had a job.

Sent from my SM-G900V using Tapatalk

Maxed out in a dollar-cost-averaging sort of manner, $692.30 per paycheck goes into it which x26 = 18K

headwinds

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #14 on: January 23, 2017, 12:49:28 AM »


You know, you can use real estate just like you use an IRA or 401(k)... More detail here:

http://evergreensmallbusiness.com/real-estate-vs-ira-and-401k-accounts-part-i/

Also, I hesitate to share this because I'm not sure it really works, but I've seen other practitioners set up an S corporation for a landlord to run a property management business through... the landlord or the landlord's spouse gets paid a wage for being a property manager. That wage supports a solo 401(k).

Just to be clear, I'm not saying that works. I haven't researched it. It also seems like too much work for dubious benefit. But now you know about it...

Thanks for this. Does the S corp end up paying the FICA tax then in this scenario? Then it is only semi-advantaged from a tax perspective

SeattleCPA

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #15 on: January 23, 2017, 10:51:38 AM »


You know, you can use real estate just like you use an IRA or 401(k)... More detail here:

http://evergreensmallbusiness.com/real-estate-vs-ira-and-401k-accounts-part-i/

Also, I hesitate to share this because I'm not sure it really works, but I've seen other practitioners set up an S corporation for a landlord to run a property management business through... the landlord or the landlord's spouse gets paid a wage for being a property manager. That wage supports a solo 401(k).

Just to be clear, I'm not saying that works. I haven't researched it. It also seems like too much work for dubious benefit. But now you know about it...

Thanks for this. Does the S corp end up paying the FICA tax then in this scenario? Then it is only semi-advantaged from a tax perspective

The S corp does create a FICA burden for you... E.g., say you want to do the $18K employee max and then a big 25% employer match. You're going to need to pay about $24K in wages to do both the $18K and the $6K... and on that $24K, you'll incur roughly $3600 of FICA and Medicare... plus there will be some other payroll taxes. You might have roughly $400 of FUTA... and then SUTA and workers compensation.

General comment: It's really hard to make the economics of a tax deferred pension work if you have to pay a bunch of extra payroll taxes... which is kinda the reason i've never gone to the work of looking closely at this arrangement to see if the structure really works or not.

Drifterrider

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #16 on: January 23, 2017, 12:13:31 PM »
For example, could I start a sole-proprietor company that does nothing but buy cheap houses and rent them out? Just curious.

Yes you can.  Will it make a difference in your tax liability?  I don't know; maybe.  Will you actively manage and participate?  Think about the large corporate apartment complexes.  You should speak with both a CPA and an attorney in your jurisdiction. 

My mother has an LLC for her rentals.  Doesn't save here anything on income taxes BUT it protects here PERSONAL assets from a business claim.

sol

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #17 on: January 23, 2017, 12:33:11 PM »
I have heard of several cases where a landlord collects an hourly wage to manage their own properties, and pays the FICA taxes, but only with good records and only for actual work you do like maintenance visits, lawn care, etc. and not just for depositing rent checks.

I'm not entirely clear on the details, but I understand this qualifies as earned income as a self employed individual, because you are paying yourself out of the rental property balance sheet instead paying someone else to do this same work.  So it counts as a deductible expense to the property but maybe gets double counted as income to you, since gross rents are income and then the hourly wage is also income.

Can anyone else clarify this for us?  Can you "pay" yourself the same amount you would otherwise pay a property management company?

SeattleCPA

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #18 on: January 23, 2017, 01:05:10 PM »
I have heard of several cases where a landlord collects an hourly wage to manage their own properties, and pays the FICA taxes, but only with good records and only for actual work you do like maintenance visits, lawn care, etc. and not just for depositing rent checks.

I'm not entirely clear on the details, but I understand this qualifies as earned income as a self employed individual, because you are paying yourself out of the rental property balance sheet instead paying someone else to do this same work.  So it counts as a deductible expense to the property but maybe gets double counted as income to you, since gross rents are income and then the hourly wage is also income.

Can anyone else clarify this for us?  Can you "pay" yourself the same amount you would otherwise pay a property management company?

I don't think that works. You'd need another entity in between you and your real estate. E.g., a C corp, S corp or partnership (or an LLC treated as a C corp, an S corp or a partnership).


sol

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #19 on: January 23, 2017, 01:55:46 PM »
I don't think that works. You'd need another entity in between you and your real estate. E.g., a C corp, S corp or partnership (or an LLC treated as a C corp, an S corp or a partnership).

Isn't that easy to accomplish, though?  Can I create one of those business structures and then be the owner and draw a taxable salary?  If not, can my spouse or child draw a taxable salary?

SeattleCPA

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #20 on: January 23, 2017, 02:22:30 PM »
You can easily create an entity that "fits" between your real estate and you... I.e., an LLC that makes an election to be treated as an S or C corp. And then, theoretically this "property management" thing works.

Also, as you note, absolutely you can pay your kids wages to work on your property... that payroll will create earnings for them.  And BTW if they're minors, that money for them will be tax-free as described here: http://evergreensmallbusiness.com/hiring-your-children-as-a-tax-loophole/

I think the question of whether you can pay your spouse or not depends on the state you're in and whether spouse owns property. But I don't know. It would seem odd to me if you can pay you or spouse can pay spouse. But I think you should be able to pay spouse and vice versa.

tralfamadorian

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #21 on: January 26, 2017, 07:17:49 PM »

Isn't that easy to accomplish, though?  Can I create one of those business structures and then be the owner and draw a taxable salary?  If not, can my spouse or child draw a taxable salary?

I'm not a CPA but I believe real estate makes the situation more complicated.

By IRS decree, real estate income is passive income for the owner of the asset, unless that person is a qualified real estate professional. There are several requirements to qualify and the IRS has recently audited extensively for people they believe are not qualified in their book- one cannot work a full time W2 job in addition to real estate, for example. Thus why I asked if OP or his spouse were both full time W2 employees.

401k contributions must be made from active income. Ergo, someone needs to be a IRS qualified real estate professional to contribute to a solo 401k from their real estate income.

I'm never heard of an S Corp being a sufficient barrier to allow a person to be paid for their work and qualify for active income. I'm not saying it's not possible; however, it is worth considering whether the cost to set up and file taxes for the LLCs to own the rentals and umbrella S corp property management company along with the loss of real estate deductions and ability for obtain cheap personal mortgages would be worth it financially.

SeattleCPA

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Re: Can you be a landlord as a sole-proprietorship business?
« Reply #22 on: January 27, 2017, 10:55:37 AM »

Isn't that easy to accomplish, though?  Can I create one of those business structures and then be the owner and draw a taxable salary?  If not, can my spouse or child draw a taxable salary?

I'm not a CPA but I believe real estate makes the situation more complicated.

By IRS decree, real estate income is passive income for the owner of the asset, unless that person is a qualified real estate professional. There are several requirements to qualify and the IRS has recently audited extensively for people they believe are not qualified in their book- one cannot work a full time W2 job in addition to real estate, for example. Thus why I asked if OP or his spouse were both full time W2 employees.

401k contributions must be made from active income. Ergo, someone needs to be a IRS qualified real estate professional to contribute to a solo 401k from their real estate income.

I'm never heard of an S Corp being a sufficient barrier to allow a person to be paid for their work and qualify for active income. I'm not saying it's not possible; however, it is worth considering whether the cost to set up and file taxes for the LLCs to own the rentals and umbrella S corp property management company along with the loss of real estate deductions and ability for obtain cheap personal mortgages would be worth it financially.

The actual statute (which comes from Congress and not the IRS) is Internal Revenue Code Sec 469... and what it says is that real estate is by definition a passive activity and losses from passive activities in excess of passive income get delayed in terms of their deductibility until the point you dispose of the activity unless an exception applies... there are several exceptions and wrinkles but the exception we're talking about here is the "real estate professional" exception.

That exception says that if you're a real estate professional, your passive losses don't get delayed... and that you're a real estate professional if you spent at least 750 hours a year and more than 50% of your time in a specified role: real estate broker or agent, real estate developer, real estate property manager.

To repeat something I said, earlier, I'm not sure how well this S corporation property management company works. I know people do it. Er, my experience with it has only been in shutting down the structure...

I also agree with the costs issue... and actually the biggest cost would be paying all the payroll taxes at the S corporation level to get the pension deduction. That would rarely be worth it in my experience.