Need my rental in an LLC to take advantage of 20% tax bracket?

[ohyouknow]

With the new tax law, my understanding is that a rental property needs to be put into an LLC in order to be capped at the 20% tax rate. If it isn’t in an LLC the funds appear on my personal tax return without a K-1 and are taxed at our regular tax rate. Our AGI this year was $202,000, so that tax rate is above 20%. We have our larger rentals in LLCs already but we have one 18-plex whose income after all expenses and depreciation was $7600. I asked my CPA and he thought I could use the 20% on any rental and it doesn’t need to be an LLC. I understand the new tax law differently. Furthermore he has told me the backdoor Roth IRA loophole was closed, which everything I google says not. I love my CPA, he is a wonderful guy and prompt and kind and honest, but I do doubt some of his advice on this sort of thing. Any input from the crowd? (Mostly on the LLC/tax issue. I’m sticking with my accountant.)

 

[pjigar]

One word: No!
https://www.greenbushfinancial.com/rental-income-will-taxes-2018/

 

[RE2Boys]

I'm not sure what 20% rate you are referring to as the only 20% rate I know of is the 20% rate on cap gains, which appears to be not what you are talking about. At one time Congress was going to cap the profits of C-corps at 20% but that was raised to 21% in the final bill. There has been some confusion whether the 21% rate would apply to S-corps but due to a hastily (poorly) worded bill, folks are awaiting further iRS guidance.

There is a 20% exclusion off income from Schedule C, E, S-corps, and Partnerships that was part of the final tax bill, but there has been some confusion as to the specific rules due to a hastily (poorly) worded bill so lots of folks are awaiting further guidance from the IRS.

If your rentals are in a single member LLC, they are reported for federal tax purposes on Schedule E (the LLC is totally disregarded as it is not a federally recognized entity)

 

[Fishingmn]

This may help - https://www.kitces.com/blog/pass-th...n-rules-qualified-business-income-qbi-limits/

Everything I have read says you do not need an LLC to qualify for the exclusion of rental property income if you meet other requirements.

 

[calmloki]

Hope springing eternal here for tax favorable interpretation. Webcast I saw with contrary info was from Marcus & Millichap, Matthew Berger VP Tax with National Multifamily Housing Council answering a question around 51:20 in the webcast: http://event.on24.com/eventRegistra...metricid=2263807&usercd=191243953&mode=launch

We have nothing in LLCs and our tax person says there isn't enough guidance from the IRS to know. The above link suggested we are screwed, but other respected sources suggest we aren't.

 

[harley]

Everything I have read says that the since the 20% break is on pass through business income there is no need for the income to be via LLC. It's a business whether it's an LLC or not. We have two rentals not in LLCs as well as a non-rental business in an LLC. I'm planning to claim the 20% break on all that income. If the IRS says no, I'll create LLCs for the rentals. I should probably do that anyway, but since it really doesn't accomplish the arms length protections it was supposed to I have never seen the reason.

 

[harley]

With the new tax law, my understanding is that a rental property needs to be put into an LLC in order to be capped at the 20% tax rate. If it isn’t in an LLC the funds appear on my personal tax return without a K-1 and are taxed at our regular tax rate. Our AGI this year was $202,000, so that tax rate is above 20%. We have our larger rentals in LLCs already but we have one 18-plex whose income after all expenses and depreciation was $7600. I asked my CPA and he thought I could use the 20% on any rental and it doesn’t need to be an LLC. I understand the new tax law differently. Furthermore he has told me the backdoor Roth IRA loophole was closed, which everything I google says not. I love my CPA, he is a wonderful guy and prompt and kind and honest, but I do doubt some of his advice on this sort of thing. Any input from the crowd? (Mostly on the LLC/tax issue. I’m sticking with my accountant.)

After actually reading the PO, I think he/she is confused and could very likely use a different CPA. There is no 20% tax rate involved, only the 20% business income exclusion. And rental income (most likely) doesn't need to be from an LLC. The backdoor Roth still exists, although the recharacterization aspect is shut down. As with doctors, it really wouldn't hurt to get a second opinion.

 

[FIREd_2015]

Here is another interpretation of the 20% pass through rule

"...For many real estate-related businesses, who do not have employees or at least a significant number of employees, the key factor for real estate businesses is the “unadjusted basis” of “qualified property”...The term “qualified property” means tangible property subject to depreciation held by the business at the end of a year and used any time during the year in the production of QBI...The thrust of these limitations is that if property is owned by a real estate related business, but it is old property – i.e. older than 10 years or where its depreciable life has otherwise expired (using non-accelerated depreciation lives) – this property is not “qualified property”, and therefore cannot be used by a business to determine its QBI and the amount of the 20% pass-through deduction..."

https://www.jdsupra.com/legalnews/the-new-20-pass-through-deduction-can-33556/

 

[pb4uski]

After actually reading the PO, I think he/she is confused and could very likely use a different CPA. There is no 20% tax rate involved, only the 20% business income exclusion. And rental income (most likely) doesn't need to be from an LLC. The backdoor Roth still exists, although the recharacterization aspect is shut down. As with doctors, it really wouldn't hurt to get a second opinion.

I wouldn't throw the CPA under the bus given that the OP is so confused. it could be that the CPA says that there is no need to have rentals in an LLC to get the 20% deduction and the OP is somehow confusing that with a 20% tax rate (which doesn't exist). And it could be that the CPA was referring to the change in Roth recharacterizations and the OP confused with it with back-door Roths.

 

[jimnjana]

Taxact tax planning software shows the reduced rate for rental property not in llc for next yr.

 

[ivinsfan]

The key here is that the rental income cannot be from a passive source. i.e,. farmland where you are simply collecting land rent and not doing anything. I was wondering about this as our C corp rents our farm land.

 

[pb4uski]

This from nolo indicates that Schedule E rentals would qualify for the 20% exclusion:

For landlords, the most stunningly good provision of the TCJA is a new tax deduction for owners of pass-through businesses. This includes the vast majority of residential landlords who own their rental property as sole proprietors (who individually own their properties), limited liability companies (LLCs), and partnerships. With these entities, any profit earned from the rental activity is “passed through” to the owner or owners’ individual tax returns and they pay tax on it at their individual income tax rates.

Example: Alice, a single person, owns a duplex she rents out. In 2018, she earns a total profit of $20,000. Alice is a sole proprietor. She reports her rental income and expenses on IRS Schedule E. She adds her $20,000 rental profit to her other income and pays tax on it at her individual tax rates. In 2018, her top tax rate is 24%, so she pays $4,800 in income tax on her rental profit.

The TCJA creates a brand new tax deduction for individuals who earn income through pass-through entities (new IRC Sec. 199A). If your rental activity qualifies as a business for tax purposes, as most do, you may be eligible to deduct an amount equal to 20% of your net rental income. This is in addition to all your other rental-related deductions. If you qualify for this deduction, you’ll effectively be taxed on only 80% of your rental income. Thus, the effective rate for taxpayers in the top 37% tax bracket is 29.5%.

This extremely complex deduction goes into effect in 2018 and is scheduled to end on January 1, 2026. All the ins and outs of the deduction have yet to be made clear by the IRS; however, it basically works as follows:

Taxable Income Below $315,000 ($157,500 for Singles)

You qualify for an income tax deduction equal to 20% of your rental income if:

• you operate your rental business as a sole proprietor, LLC owner, partner in a partnership, or S corporation shareholder, and
• your total taxable income for the year from all sources after deductions is below $315,000 if you’re married filing jointly, or $157,500 if you’re single.

Example: Assume that Alice from the above example had $100,000 in taxable income in 2018. Since she was a sole proprietor, she may take a pass-through income deduction of 20% x $20,000 rental income = $4,000. This saves her $960 in income tax.

https://www.nolo.com/legal-encyclopedia/how-the-republican-tax-plan-affects-landlords.html

 

[CaliKid]

I just listened to a podcast on biggerpockets.com last week with two CPAs who focus on real estate investors and they said it does not need to be in an LLC. Schedule C is fine.

 

[pb4uski]

Which would mean Schedule E in the case of rental property.... Schedule C's are usually sole proprietorship businesses.

 

[gauss]

Sole Proprietorship qualifies too when I read the bill.

-gauss

 

[ohyouknow]

I wouldn't throw the CPA under the bus given that the OP is so confused. it could be that the CPA says that there is no need to have rentals in an LLC to get the 20% deduction and the OP is somehow confusing that with a 20% tax rate (which doesn't exist). And it could be that the CPA was referring to the change in Roth recharacterizations and the OP confused with it with back-door Roths.

Yes, after reading all the replies I realize the confusion is mine!

 

[ohyouknow]

This from nolo indicates that Schedule E rentals would qualify for the 20% exclusion:



https://www.nolo.com/legal-encyclopedia/how-the-republican-tax-plan-affects-landlords.html

Thank you! This example helped a lot.