we run several different businesses (c-store, wash, rental real estate) and i also work another job in which i am considered from a tax perspective as a high earning indivual, i.e. >150k. our wash and c-stoe are in s or c corp and the rental properties are in an LLC. i am unable to deduct basically anything associated with the rental property because of the passive investment laws governing rental property and "high income earning indivuals" my wife manages all of our business and does not draw a salary. my question is has anyone ever incorporated their rental property as a c or s corp, taken a salary and then been able to take the tax losses in spite of a spouse being in this high income bracket. thanks for your experiences.
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tax question
- Thread starter washman9
- Start date
I was in the same situation, only slightly different. As a business owner, I could "control" my annual compensation to stay low enough to use passive losses from real estate and investments to wash against ordinary income. But, then I went and got married, and when my wife's income was added we went above the threshold and could no longer deduct any passive losses. Even with my taking only the minimal salary ... yikes.
I've searched far and wide for a loophole to get around this, and only found one that works. But the bad news is that it probably won't work for you. Out of all the professions out there, only a licensed real estate broker is permitted to always wash all passive losses against ordinary income--regardless of income levels. This makes becoming a broker quite attractive, of course. To qualify, you must have a broker's license and spend 750 hours per year on real estate activity.
Since I own a number of investment and rental properties (outside of the car wash), I got my broker's license and do qualify by managing the rental and investment property. This is the only way around the passive loss issue that I have found, and I doubt that it will work for you if you are in any other industry except real estate.
Of course, if you do learn of another method, I and many others would like to learn of it.
I've searched far and wide for a loophole to get around this, and only found one that works. But the bad news is that it probably won't work for you. Out of all the professions out there, only a licensed real estate broker is permitted to always wash all passive losses against ordinary income--regardless of income levels. This makes becoming a broker quite attractive, of course. To qualify, you must have a broker's license and spend 750 hours per year on real estate activity.
Since I own a number of investment and rental properties (outside of the car wash), I got my broker's license and do qualify by managing the rental and investment property. This is the only way around the passive loss issue that I have found, and I doubt that it will work for you if you are in any other industry except real estate.
Of course, if you do learn of another method, I and many others would like to learn of it.
Route66CarWash
Owner/Manager
Washman - Let me start off by saying that I am not an accountant, but I will tell you that I too have a similar situation. I have a very successful S-Corp, a car wash that is an S-Corp, and multiple LLC's (12 or 13).
I would first suggest that you find a really good accountant if you've not already done so.....preparing your own taxes in the situation you've explained is not a good idea. I wouldn't necessarily consult with a CPA (not saying their all bad, but most of them will cost you money). I would find an EA (enrolled agent). EA's are virtually identical to a CPA less all the red tape and annual certifications that govern the designation. This means they have more opportunity to explore the gray areas of the laws than a CPA.
If you're C-store is indeed a C-Corp, I would suggest speaking with the accountant or a tax attorney about changing it to an S-Corp. It is my understanding that income generated by a C-Corp is transferred directly to the owner(s) as income, whereas in an S-Corp the tax liabilities transfer to the corporation first and then profits minus deductions are issued to it's stockholders via a K-1 Dividend. As you could imagine the opportunity to benefit from tax deductions are much higher for you the stockholder.
It may not be a bad idea to then set-up another LLC that your wife manages and operates. This LLC can bill the S-Corp for her or it's services (which is a tax deduction). Anything she needs or purchases for her to operate her business is then a possible tax deduction under the rules of an LLC; i.e. automobile lease, computer, supplies, office furniture, software, etc.
I know nothing about Rental Property and the tax laws associated with them, but I find it strange that you wouldn't be able to benefit from the passive income produced by the LLC.
Once again, speak with a professional. I would venture to say that if your not getting this type of advice now you should consider finding someone else.
I would first suggest that you find a really good accountant if you've not already done so.....preparing your own taxes in the situation you've explained is not a good idea. I wouldn't necessarily consult with a CPA (not saying their all bad, but most of them will cost you money). I would find an EA (enrolled agent). EA's are virtually identical to a CPA less all the red tape and annual certifications that govern the designation. This means they have more opportunity to explore the gray areas of the laws than a CPA.
If you're C-store is indeed a C-Corp, I would suggest speaking with the accountant or a tax attorney about changing it to an S-Corp. It is my understanding that income generated by a C-Corp is transferred directly to the owner(s) as income, whereas in an S-Corp the tax liabilities transfer to the corporation first and then profits minus deductions are issued to it's stockholders via a K-1 Dividend. As you could imagine the opportunity to benefit from tax deductions are much higher for you the stockholder.
It may not be a bad idea to then set-up another LLC that your wife manages and operates. This LLC can bill the S-Corp for her or it's services (which is a tax deduction). Anything she needs or purchases for her to operate her business is then a possible tax deduction under the rules of an LLC; i.e. automobile lease, computer, supplies, office furniture, software, etc.
I know nothing about Rental Property and the tax laws associated with them, but I find it strange that you wouldn't be able to benefit from the passive income produced by the LLC.
Once again, speak with a professional. I would venture to say that if your not getting this type of advice now you should consider finding someone else.
Washman9:I used to prepare taxes and Sequoia in on track. I did it. It has worked. Look up "passive loss rules" and similar terms at irs.gov so you are generally familiar. Try and find a CPA that knows this particular area. It is not that complex but over the years I have spoken to some that caused me concern due to their lack of knowledge (tax rules are still a hobby).
Route66CarWash: S corps do not pay tax. The income/loss flows directly to shareholders. C corps are taxed and then the distributions are taxed again at shareholder level. In general, small businesses are S corps or LLcs not C corps due this issue. Why dont huge companies become S corps? because I think you can only have 35 sharholders. Why 35? I dont know. Man, I love rules (rather, knowing them in order to reduce taxes)
Route66CarWash: S corps do not pay tax. The income/loss flows directly to shareholders. C corps are taxed and then the distributions are taxed again at shareholder level. In general, small businesses are S corps or LLcs not C corps due this issue. Why dont huge companies become S corps? because I think you can only have 35 sharholders. Why 35? I dont know. Man, I love rules (rather, knowing them in order to reduce taxes)
Why would this activity be considered "passive"? Sounds active to me. If for what ever reason you can't get away from being labeled "passive", why not make it a profitable rental. The only way you can be at a loss is if you're highly leveraged on the assett. Borrow the money on one of your other assetts that is not passive (therefore you get full deductability) and pay down the debt on the passive one so that it makes a profit. In this tax environment I can't imagine why anyone would run passive investments at a loss.
A few sources of info...check out www.getrealrei.com, they also have a Podcast (free, access from iTunes, also free from Apple) They have a lot of good info re real estate structures.
I have an LLC with a S-Corp. tax filing status. This gives the flexibility of an LLC and the pass through taxes of an S. I pay myself a fair salary and then dividends, avoiding FICA etc. on the dividends. Definitely need good help. I have a CPA that lives for this stuff. Worth every cent...and too cheap to bill me much
I have an LLC with a S-Corp. tax filing status. This gives the flexibility of an LLC and the pass through taxes of an S. I pay myself a fair salary and then dividends, avoiding FICA etc. on the dividends. Definitely need good help. I have a CPA that lives for this stuff. Worth every cent...and too cheap to bill me much
SCS - Rentals are a good investment BECAUSE you show a loss. In reality, your rent income should cover expenses, but since you can claim depreciation and interest, you should show a loss on your taxes. The payoff is from paying down the loan and from appreciation when you sell it. An added benefit is you only pay capital gains taxes. If you finance the property, you have less of your own money tied up which improves your ROI.
Washman, I pose this problem to my CPA once a year and he has not been able to help yet. I have a real estate brokers license but I still don't take the deduction because I pay a management company to handle the properties.
Washman, I pose this problem to my CPA once a year and he has not been able to help yet. I have a real estate brokers license but I still don't take the deduction because I pay a management company to handle the properties.
