Auto news on Youtube Oct 24 2018

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🤔 LLC or Corporation For Rental Property? (Do I Need a Corporation For Rental Property Management?) - Duration: 6:31.

- [Toby] We have a vacation rental that we're rehabbing.

If we form an LLC to collect rents,

so this is where I get confused,

you're rehabbing a property but now you're collecting rents.

In my world, those are two different business activities.

And this LLC is owned by a corporation,

I would never rent a property that's owned by a corporation.

What role would the corporation play?

How do the funds actually get from the customer

to us personally?

So, this is where there's a few questions.

Do you have an answer that you want to give

on this one first-

- [Jeff] Well, I think in this case,

we're saying that the LLC that's collecting the rent,

more or less the property manager,

is owned by the corporation.

- [Toby] That might be the case.

In which case, it should not be owned in that same LLC.

- [Jeff] Right, you don't want your rentals

in your corporation, in any way shape or form.

- [Toby] Yeah, and the reason being

is 'cause if you ever take it out,

it's considered wages, it's like active ordinary income.

But, in this particular case,

there's an LLC owned by the corp.

Usually what we're seeing is

it's not owned by the corporation,

but it's managed by the corporation.

And so we'll have an LLC that rehabs and does rentals,

and it has a corporation that's collecting the rents.

Doing all the repairs,

taking care of all the expenses associated with it,

and then it nets out, just like a property manager would

and gives you the difference.

- [Jeff] Yeah, and I think we're used to hearing

the term rehab used for people who are flipping properties.

- [Toby] Yeah.

And if you're flipping, then more power to you.

You would just, the relationship between the LLC

and the corp is from a tax standpoint.

The LLC flows up into the corp.

So, you're really just trying to get that flip

on to the corporation which is what we want,

because real 10,000 foot view,

you're either an active business which is flipping,

or rehabbing, or developing, wholesaling,

or you're an investor which is buy and hold

for long-term appreciation, but you're not both.

- [Jeff] So in a case like this,

if the LLC is acting as a property manager

for the rental property, they may collect the rent,

they may pay certain expenses for the property.

However, none of that income,

none of those rents or expenses belong to the LLC

or the corporation.

They belong to the rental property.

So what the LLC or the corporation would do

is they would collect a management fee

for being property manager.

- [Toby] So It'd be like this, I'm going to draw it up,

let me see if I can make it.

Get my little pen out here.

So let's say that you have the rental,

and you have tenants that pay the rental cash,

then you have a corporation that's managing,

and you pay some money over here.

The question is how do you get money?

I'm going to make you down here.

How do you get money?

And the way you get money is,

in a rental property, you're going to be the tax owner.

Meaning that I'm going to make

that disregarded our partnership,

it's going to flow onto your return.

So whether you leave it in here,

or it comes down here, doesn't matter.

It's still going to end up on your 1040.

Doesn't matter.

If it's paid to the corporation,

how does it get it back out to you?

It either stays in the corporation

and the corporation pays tax on it if it's a C corp.

If it's an S corp,

then it's going to flow down to you regardless.

If it's a C corp or an S corp,

it can reimburse your expenses associated with it

and there's lots and lots of ways to get money out.

So, I'm hoping that that is making sense.

But, what we know for sure is that rehabs and flips

are generally done in a corp.

Rents is an LLC owned by you.

So if you really want to get down to it.

There's going to be another question that's asked

that we're going to break this down even further.

But we'll get all these things,

and we have lots of questions that are being asked, too.

I'm going to look for some of the questions

that are relevant to this one.

They may mean, if it's a short-term vacation rental.

Alright.

We're going to answer that question when we get to the Airbnb,

but if it's short-term, meaning seven days or less,

then you are a hotel as far as the IRS is concerned

and you want that to go under a corp.

If the rental is in an LLC,

and you want to flow to the corp,

isn't that contribution my LLC to corp?

No.

So if you want the money to go to the corp,

you're paying the management fee.

If you don't pay the management fee,

then it flows down to you individually, which is good.

It's rents, it's passive, so we like that.

So, we want to make sure that we do no harm.

- [Jeff] One thing we've had issue with in the past

is sometimes clients don't understand

that they bought a property and they're rehabbing it

for up to a year.

It's not available for rent.

So your expenses aren't deductible

until it is available to rent.

Now, we don't lose those expenses,

we end up capitalizing 'em,

including in the value of the property

but just keep in mind, until you're able,

you don't have to actually be renting them

but you have to be advertising them for rent.

- There is a great case, the Woody case

where there was somebody taking expenses for education

involved in real estate investment

which is what Jeff is talking about.

When you're holding property for appreciation,

the second you put it up for rent

and you actually make it available

is the second you're actually in business.

- Right. - Before that you're not.

And so, what's why we tend to use a corporation

'cause a corporation is in business at the moment,

it's managing the LLC.

That's what we like to do.

Alright, let's keep going on, we've got lots.