The Wealthy Accountant Forum

General Category => Real Estate => Topic started by: Tim on April 21, 2017, 01:24:55 PM

Title: Forming an LLC to Manage Real Estate
Post by: Tim on April 21, 2017, 01:24:55 PM
My wife and I own two rental properties. We have a positive cash flow so I would like to shelter that revenue. Since my wife actually manages the properties, can she form a sole proprietorship or LLC that we pay to manage the properties?

If so, I would then have all that revenue go to a SEP IRA that I would set up for the company. If not, any other suggestions on sheltering the positive cash flow that don't involve me spending money to incur additional expenses?
Title: Re: Forming an LLC to Manage Real Estate
Post by: KeithTax on April 24, 2017, 07:59:39 PM
Real estate is passive income no matter what you do (with the exception of organizing as a corporation and taking a wage). You can own your rentals in an LLC but it will not allow additional retirement contributions. Sorry.
Title: Re: Forming an LLC to Manage Real Estate
Post by: Maccountant on July 20, 2017, 03:33:47 PM
The beauty of rental real-estate is that it is considered "passive income" which means it is not subject to "payroll or self-employment" tax. In other words, you do not have to pay the 15.3% FICA on wages from rental income. Unlike your W-2 earnings where you have 7.65% withheld and your employer kicks in the additional 7.65%.

Establishing a property management company to mange real-estate, and invoice you (the property owner) is possible, but may not be advantageous. The management fees earned by the property management company would be considered earned income. Thus you would have to pay the 15.3% plus income tax on those earnings.

Additionally, the property management company could not bill for the entire profit, the management company would have to bill a "reasonable amount", typically most management company's charge 10% of rents collected.

Would you offer property management services to other landlords in your area? Or are you just looking to play a shell game?

Title: Re: Forming an LLC to Manage Real Estate
Post by: Tim on August 22, 2017, 11:13:23 AM
Since it would have been my spouse managing the company new "Management" company, I would have said it would offer services to other landlords; however, it appears I got ahead of her interest in managing any more properties that the two of ours that she manages for us already as owner.

Anyway, thanks Maccountant, you actually addressed my original question very clearly. Absent bringing in additional property management accounts, it does not look like this is a good idea given the "reasonable fee" restrictions and self-employment income tax issues.