Over on TaxAlmanac...

[gordywest]

there was a good discussion that I would like to see answered over here. Does setting up an LLC for Rental Real Estate activity still prevent someone from using losses (through a K-1) that they couldn't have used if they just used Sch E...an earner over 150K...if that is true, what is the best way to handle rentals for high income earners??

I am really starting to like this board!

Gordy from Albuquerque

[Bees Knees]

The passive activity loss rules would still apply. The LLC would simply be passing the loss through to the individual, who in turn is subject to the passive activity loss rules.

Passive loss rules were designed to prevent high income taxpayers from not paying tax due to the loopholes associated with passive losses. The only way to get around that is to either have passive income to offset the loss, dispose of the activity, have the taxpayer qualify as a real estate professional, or have the individual not earn so much money.

Take your pic.

[Snaggletooth]

somewhat passive

Gordy when it comes to rental property, there is yet another category which is not really a "passive" loss. This is "rental income with active participation" and is somewhat kinder than the "pure" passive category.

This "rental income with active participation" is spelled out as a separate line item on both form 8582 and K-1s 1065s and 1120Ss. The advantage to not being classified as "passive" is that you are allowed to deduct losses. Even at that, the losses begin to phase out as early as $75,000.

Remember, any loss that is disallowed under the "passive" rules or the phase-out threshholds for active participation rentals can still be recovered in two ways. 1)can first be used to offset rental profits on other properties, and 2)can be added to basis upon ultimate disposition of the property. You can't choose 2) if 1) is available. Normally, you wouldn't want to anyway -- 2)brings you a tax benefit limited to the capital gains ceiling.

Welcome to the Tax Board from the land of the Rio Grande...

Best Regards, Snaggletooth

[George Boutwell]

what is the best way to handle rentals for high income earners??

Tell them to take some of their high earnings and pay off some of their mortgages on rental property, until they no longer show a loss.