Any benefit to forming LLC??

[John Valko]

I have a client that has an AGI of approximately $200,000 which includes $55K of capital gains and $18K of dividends & interest. He is married with no dependents. He has 3 rental properties that last year had $15K in losses but were disallowed because his MAGI exceeded $150K. His Schedule A deductions were also limited because of his income.

He is asking me if there would be any benefit to him to form an LLC for his rental properties. This would be a single person LLC. Is there any benefit to him becoming an LLC and would you in this situation just show income and losses from the rental property on a Schedule C for the rentals instead of Schedule E?

Quickly, could someone explain the true benefit of forming an LLC and does it have to be formed before the end of the year?

Thanks

[BHoffman]

Hi John,

The main benefit is liability protection. Since the IRS disregards SMLLCs, his tax return wouldn't change.

[erchess]

Another Idea

Couldn't he create a C Corp to collect the rent from tenants and take care of obligations to them and to pay the local property taxes? Then couldn't the Corp rent the properties from him for something less than the true economic profit? This would of course involve double taxation but would it not let the corporation accumulate some of his wealth exempt from individual income tax?

I would warn him to take care that the lawyer who sets things up does not title the real property to the corporation because that would lead to great financial pain when the properties were sold.

If the houses were contributed to an SMLLC that might increase liability protection but it would also mean paying SE Tax on the Rent paid by the C Corp if I am not mistaken.

[Bees Knees]

A single member LLC on a real estate rental activity would still file Schedule E because it is disregarded for federal tax purposes. Thus, the federal filing would be as if it were not an LLC.

Liability protection from an LLC is no substitute for liability insurance. You still need insurance. However, in Minnesota, becoming an LLC is cheap, and there are no annual fees to pay. Thus I recommend all Schedule C and Schedule E filers to be an LLC in Minnesota. If for no other reason than there is some degree of liability protection, you can think of the LLC status as one more precaution. Other states require annual fees, so it might not be worth the extra cost for the little extra benefit. You have to decide if it is worth it in your state to be an LLC.

[Jesse]

Agree with Bees Knees. Another thing to keep in mind is the seperation of the rentals from personal. I have been taught to keep anything in the LLC seperate from any personal or as the corporate veil, the LLC veil can be pierced, thus voiding your liabilty protection. Maybe your client already does, but if not, start seperate bank accounts, don't comingle with personal, have tenants remit payment to LLC, etc...

Wisconsin has an annual fee of $25.00.

[Davc]

No tax benefit. Stays on Schedule E. The Schedule C nonsense is only for HW qualified joint ventures. (And they aren't qualified if they put the property into a MMLC.)