LLC BENEFITS

There are many advantages of forming an LLC for rental properties. Some of the most popular advantages are that members are afforded limited liability protection and have pass-through taxes similar to a partnership.

By forming an LLC instead of a corporation, you get all the benefits of forming a corporation but you avoid
a few drawbacks that you would run into if you formed a corporation. When you form a corporation, you potentially subject yourself to double taxation and excessive paperwork. Corporations have taxes to pay on their income and then distributions to the owners are taxed.

LLCs allows for several members. They have a managing member, who is typically the person responsible for managing the business. If an LLC has just one owner, it will be taxed as a sole proprietorship. The profits or losses of the business pass directly through to the owners' personal income tax returns, on their Form 1040 or Form 1040NR. An LLC with two or more partners files a Form 1065, and then lists each member's taxable profit on Form K-1, which then passes-through to their personal returns.

Members are compensated using either distributions of profit or guaranteed payments. A distribution of profit allows each member to pay themselves by writing checks. Guaranteed payments represent earned income to the members.

This article does not cover all the nuances regarding the taxation for LLCs. Please contact us if we can be of assistance in regard to this matter.

TAX IMPLICATIONS OF PROPERTY INVESTMENT

The most common type of real estate investment for the individual is in the form of rental property. Usually, taxpayers purchase either a single unit (a family house, an apartment, or a commercial building) or a multiple unit rental property (an apartment building or several apartments) and rent them.

The taxpayer will operate the property as a landlord and sometime in the future sell the property. Tax consequences occur during the period of operation and upon the sale of the property in the future. If the property is operated at a profit, then the profits are taxed as ordinary income at the taxpayer's normal income tax rate (15 percent, 28 percent or 31 percent). If the property is operated at a loss, then a complex set of rules applies pertaining to the tax treatment.

Since some rental properties operate at a loss after depreciation, in the first years of ownership, the loss provisions of the tax law are important. The first consideration in the deductibility of the loss is the AT-RISK rules of the Internal Revenue Code. Basically, the AT-RISK rules state that you are only allowed to deduct an amount which you have invested or are obligated to contribute in the future.

If the taxpayer has losses which qualify under the At-Risk provisions, he must then look to the Passive Activity loss limitation rules. A Passive Activity is an activity that involves the conduct of a trade or business in which the taxpayer does not materially participate. By the Internal Revenue Services definition, a rental activity is considered a Passive Activity regardless of the taxpayer's participation. The general rule for Passive Activity losses is that losses from Passive Activities may not be deducted from other types of income.

HOW WE CAN SERVICE THE NEEDS OF CUSTOMERS

Our Accountants are a full-service CPA firm, dedicated to meeting the needs of today's busy people. They use state-of-the art technology in order to provide the highest quality of work for you in a timely manner.

Accurate and timely accounting information is a necessity for any successful business. Our Accountants can assist you on either a temporary or on-going basis. Due to the size of their firm, clients receive incomparable, personalized, quality service. They offer the following:

• Tax Planning and Return Preparation Services
• Accounting and Bookkeeping Services
• Business Entity Creation and Resident Agent Services
• Payroll Preparation and Return Preparation Services