Author Topic: questions about LLCs and tax deductions.  (Read 1691 times)

PAstash

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questions about LLCs and tax deductions.
« on: December 03, 2016, 12:10:51 AM »
I purchased a fixer upper last year with the intent of renting it out.

1 year later all repairs are completed within budget. I'll have the property paid off inside of six months. so fully renovated fully paid off year and six months after purchase. Our (me and my SO) plan is to find our permanent home now. Once we find the permanent home and move out of the rental I can start the rental business I've been planning for awhile. So we move out. How do I place the rental into a LLC? Should I put it in a LLC? How long after it's been rented do I qualify to deduct future repairs (that's post living there repairs) on my future taxes? is it correct in the year that I sell the property I can deduct the repairs I made while living there?

The idea is to have the rental fully cash flowing so I can use part of the cash flow to purchase another rental and so on and so on. to be clear once the rental is rented. the rental business money will be the rental business money and i'll look at it as a pure investment not life style money. I've got my W2 income to take care of our primary residence and for living expenses.


SeattleCPA

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Re: questions about LLCs and tax deductions.
« Reply #1 on: December 09, 2016, 04:05:14 PM »
Going to try and answer your questions in order...

HOW: Probably you quit claim the property to the LLC... but you might want to consult an attorney and you might want to make sure any lender is okay with transfer since act may trigger due on sale clause...

SHOULD: Probably your LLC would be a disregarded entity so it shouldn't make any tax accounting difference. A consultation with an attorney might give you insights into legal benefits of such a transfer...

DEDUCTING FUTURE REPAIRS: Assuming you meet the tangible property regulation rules for deducting repairs and you're not limited by the Sec. 469 passive loss limitation rules, you would deduct the repairs and get a tax benefit as soon as you spend the money. E.g., you place into service on Monday? On Tuesday, repairs (and other expenses) should be deductible.

REPAIRS WHILE PERSONALLY USED: These shouldn't be deductible when sold since as repairs they were never added to the basis of the property. There's symmetry here... you don't capitalize repairs for a rental... you don't capitalize repairs for a personal residence.

Hope that helps.

PAstash

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Re: questions about LLCs and tax deductions.
« Reply #2 on: December 10, 2016, 10:58:35 AM »
Going to try and answer your questions in order...

HOW: Probably you quit claim the property to the LLC... but you might want to consult an attorney and you might want to make sure any lender is okay with transfer since act may trigger due on sale clause...

SHOULD: Probably your LLC would be a disregarded entity so it shouldn't make any tax accounting difference. A consultation with an attorney might give you insights into legal benefits of such a transfer...

DEDUCTING FUTURE REPAIRS: Assuming you meet the tangible property regulation rules for deducting repairs and you're not limited by the Sec. 469 passive loss limitation rules, you would deduct the repairs and get a tax benefit as soon as you spend the money. E.g., you place into service on Monday? On Tuesday, repairs (and other expenses) should be deductible.

REPAIRS WHILE PERSONALLY USED: These shouldn't be deductible when sold since as repairs they were never added to the basis of the property. There's symmetry here... you don't capitalize repairs for a rental... you don't capitalize repairs for a personal residence.

Hope that helps.

on the how: if it's paid off would i still need to notify the lender who held the mortgage as they are no longer the lender? well any real estate attorney do out of the yellow pages? Are the attorney fees tax deductible?

There is no wait time on being able to write off repairs once it's rented? I was told you need to be renting for two years and be considered a full time real estate employee have to work something like so many hours a month before you qualify for write offs? any of that make sense?

Thanks for your response. you were the only one.
« Last Edit: December 10, 2016, 11:02:16 AM by PAstash »

Papa bear

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Re: questions about LLCs and tax deductions.
« Reply #3 on: December 10, 2016, 11:46:53 AM »
Take a look at IRS publication 527. It will answer all of your tax questions.

Think of it this way: once you place the property into service as a rental, you now own a business.  Repairs are business expenses that will net against your rental income.  The publication will give you guidance as what constitutes a repair vs what needs to be capitalized.

Being able to take the passive loss from your rental business against your active income is subject to limitations.

I personally do not keep my rentals in an LLC. I have umbrella insurance to handle risk of litigation.



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SeattleCPA

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Re: questions about LLCs and tax deductions.
« Reply #4 on: December 12, 2016, 01:16:39 PM »
Going to try and answer your questions in order...

HOW: Probably you quit claim the property to the LLC... but you might want to consult an attorney and you might want to make sure any lender is okay with transfer since act may trigger due on sale clause...

SHOULD: Probably your LLC would be a disregarded entity so it shouldn't make any tax accounting difference. A consultation with an attorney might give you insights into legal benefits of such a transfer...

DEDUCTING FUTURE REPAIRS: Assuming you meet the tangible property regulation rules for deducting repairs and you're not limited by the Sec. 469 passive loss limitation rules, you would deduct the repairs and get a tax benefit as soon as you spend the money. E.g., you place into service on Monday? On Tuesday, repairs (and other expenses) should be deductible.

REPAIRS WHILE PERSONALLY USED: These shouldn't be deductible when sold since as repairs they were never added to the basis of the property. There's symmetry here... you don't capitalize repairs for a rental... you don't capitalize repairs for a personal residence.

Hope that helps.

on the how: if it's paid off would i still need to notify the lender who held the mortgage as they are no longer the lender? well any real estate attorney do out of the yellow pages? Are the attorney fees tax deductible?

There is no wait time on being able to write off repairs once it's rented? I was told you need to be renting for two years and be considered a full time real estate employee have to work something like so many hours a month before you qualify for write offs? any of that make sense?

Thanks for your response. you were the only one.

You don't need to notify the old lender...

That's correct that there's no wait time on repairs.

The info you received on "two years" and "need to be real estate professional" aren't accurate. Or perhaps more correctly are incomplete. As Papa Bear suggests, you'd get good value by looking at IRS pub 527.

You might also want to read through this blog post which summarizes some of the info:

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