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LLC/Rental property taxes
Old 06-03-2023, 08:01 AM   #1
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LLC/Rental property taxes

Looking for advice from people with experience renting vacation homes. We recently bought a beach house () and are renting it 10 weeks/year to defray some of the operating costs.

The asset/expenses/insurance are all run through an LLC.

We set this up on a bit of a crash program so I'm only now digging into how I manage the taxes on it. I believe I need to issue myself a K-1 from the LLC. As we are using it for more than 2 weeks per year, I lose depreciation and the right to deduct improvements. I think.

I'd welcome advice on how to manage the taxes (or other aspects) of this set up.

Thanks!
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Old 06-03-2023, 08:11 AM   #2
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Our LLC had a checking account that rents were deposited to and expenses were paid from, including real estate taxes. And yes LLC members get a K-1 from the LLC. I would get a tax accountant involved who is familiar with LLC’s
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Old 06-03-2023, 08:14 AM   #3
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Our LLC had a checking account that rents were deposited to and expenses were paid from, including real estate taxes. And yes LLC members get a K-1 from the LLC. I would get a tax accountant involved who is familiar with LLCís
Thanks!

We do have things running through a checking account for those purposes. Before it and the related debit card were set up, we put a load of house-related expenses on our personal credit card. I went so far as to put the right amount of money for the purchases into the business checking account and then paid the personal card from there to ensure the business-related expenses were kept clean from the personal stuff. My main concern was to avoid a fact pattern that could allow someone to pierce the LLC structure in the event of a major liability incident.
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Old 06-03-2023, 08:19 AM   #4
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We have a Jersey Shore home we rent for a few weeks a year. We just own it in our name with plenty of umbrella coverage.
Youíll find while the depreciation and expenses are somewhat reduced, youíll still get a good benefit in your taxes. We have yet to pay a penny in state or federal tax for the rental income. We rent it for 4-6 weeks each year for $4350/week. Deductions for property taxes, insurance, landscape maintenance, depreciation, utilities, mileage, property maintenance, rental license and fire inspection offset the income enough.
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Old 06-03-2023, 09:08 AM   #5
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We (me and 3 partners) had an office building that we rented to our engineering firm, then sold it and 1031’d into 3 Florida condos. Sold the condos and dissolved the LLC about 7 years ago. Had the LLC for about 15 years and I don’t remember any tax hits because of the LLC.
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Old 06-03-2023, 12:02 PM   #6
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We have a Jersey Shore home we rent for a few weeks a year. We just own it in our name with plenty of umbrella coverage.
Youíll find while the depreciation and expenses are somewhat reduced, youíll still get a good benefit in your taxes. We have yet to pay a penny in state or federal tax for the rental income. We rent it for 4-6 weeks each year for $4350/week. Deductions for property taxes, insurance, landscape maintenance, depreciation, utilities, mileage, property maintenance, rental license and fire inspection offset the income enough.
Nice! Do you pro-rate the expenses, etc for the number of weeks it is rented each year?
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Old 06-03-2023, 12:11 PM   #7
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Nice! Do you pro-rate the expenses, etc for the number of weeks it is rented each year?


Yes. We follow all the rules. I think part of the reason we donít pay a NJ tax is because I get a veteranís exemption. We file with them every year, but havenít owed anything yet.
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Old 06-03-2023, 03:16 PM   #8
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Yes. We follow all the rules. I think part of the reason we donít pay a NJ tax is because I get a veteranís exemption. We file with them every year, but havenít owed anything yet.
super. Thanks!
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Old 06-03-2023, 03:42 PM   #9
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We had a vacation rental for 10 years that we used as well. Rents and expenses went through an LLC. Taxes done by a pro (enrolled agent.) We never issued ourselves a K-1.

One important point that no one has mentioned is that federal tax law ignores the existence of state LLCs. They simply do not exist for federal purposes.
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Old 06-03-2023, 06:31 PM   #10
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We had a vacation rental for 10 years that we used as well. Rents and expenses went through an LLC. Taxes done by a pro (enrolled agent.) We never issued ourselves a K-1.

One important point that no one has mentioned is that federal tax law ignores the existence of state LLCs. They simply do not exist for federal purposes.
Interesting.

My LLC yearly K-1's normally showed a Net rental real estate loss in Part III, Line 2. Same amount showed up in Fed tax form 8582 Passive Activity Loss Limitations.

IIRC, these passive losses added up year by year until we sold. Then I believe that they were considered losses against the gain on the sale. Looking back on it now, it looks quite complicated on my Fed tax returns, but there is quite a bit of numbers going from my K-1's to fed tax forms.
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Old 06-03-2023, 07:18 PM   #11
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Interesting.

My LLC yearly K-1's normally showed a Net rental real estate loss in Part III, Line 2. Same amount showed up in Fed tax form 8582 Passive Activity Loss Limitations.

IIRC, these passive losses added up year by year until we sold. Then I believe that they were considered losses against the gain on the sale. Looking back on it now, it looks quite complicated on my Fed tax returns, but there is quite a bit of numbers going from my K-1's to fed tax forms.
I would have to go look at old taxes returns from several years ago. Maybe there was a K-1. We followed all the rules. Your mention of passive activity losses rings a bell. The PALs offset the accumulated depreciation when you sell. Rather the accumulated depreciation reduces the cost basis.
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Old 06-04-2023, 04:54 AM   #12
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I would have to go look at old taxes returns from several years ago. Maybe there was a K-1. We followed all the rules. Your mention of passive activity losses rings a bell. The PALs offset the accumulated depreciation when you sell. Rather the accumulated depreciation reduces the cost basis.
Yes. Here's an interesting story on the Passive Activity Losses. We (our LLC partners) were also the same partners at our engineering co. Sitting around chatting, one partner started talking how his accountant classified him as a "Real Estate Professional". And that allowed him to claim his losses yearly as active losses on his tax return.

I shared the same accountant, so I asked the accountant if I could be classified as a Real Estate Professional. Sure he said. So I filed as a real estate professional for a couple of yours claiming the LLC losses on my personal returns.

Then the IRS audit came. Seams that being a Real Estate Professional involves more than just stating that you are one. Had to pay the IRS $ equal to the tax refunds I got from the losses. Luckily they didn't charge me penalties and interest. I later got to use these losses when we sold.
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Old 06-04-2023, 10:15 AM   #13
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I would have to go look at old taxes returns from several years ago. Maybe there was a K-1. We followed all the rules. Your mention of passive activity losses rings a bell. The PALs offset the accumulated depreciation when you sell. Rather the accumulated depreciation reduces the cost basis.
Do you need to file a 1065 return and K-1 if you're a single member LLC? We're a 3 member LLC holding an apartment building throwing off significant annual depreciation (from major improvements), which shows losses on our Partnership 1065 return, despite a decent yearly rent roll income. One of the members is actually a real estate professional, as an active Real Estate Broker, and I suspect she deducts the losses that show on her K-1 annually against personal income. On the other hand, I have significant capital losses from the depreciation that will offset capital gains when the building is sold sometime this year.
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Old 06-04-2023, 04:07 PM   #14
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This is all super helpful. Thanks for posting. As I expected, there is a fair deal of complexity here...
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