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Tax Information With A Mother's Touch
Published by Eva Rosenberg, MBA, EA
Volume 3 Issue 128 August 31, 2001
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Tax Information With A Mother's Touch Published by Eva Rosenberg, MBA, EA Volume 3 Issue 128 August 31, 2001 |
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» From: Somewhere in AOL-Land Dear TaxMama, We own 3 income properties in a Living Trust, how do we protect ourselves if one of our tenant sues us over something. Have been hearing a lot about LLP. What are the pro and cons of holding it under LLP and does each property have to be individually held as a LLP. Please let me know where I could get more info. Thanks! Farida  First of all, you cannot have an LLP. Those are specifically designated for licensed professionals. (oh, at least in California, that is.) What state are you in? Each state has completely different rules about LLPs and LLCs. Since I don't know what state you're in - and don't have the time to research your state's laws .... I really suggest that you take some of that income from those properties and go visit a local tax pro. It is well worth it to get advice from someone who can see your whole portfolio, your tax returns and your entire financial picture. But, in general, here are just some pros/cons of LLCs ===> Pros They protect you from personal liability. You can file the LLC tax return as either a Schedule C (if you own the company alone) a Corporation, or as a partnership. I am not certain if you can file the income on a Schedule E (rental property), but, it's possible. There must be some advantage to LLCs, since I understand that many people owning real estate are turning to that option. (But, then again, people often do things after listening to clever commercials and advertisements, without understanding the consequences - and there ARE a lot of companies advertising and encouraging people to form LLCs when they don't really need them.) ==> Cons If you file as a Schedule C, you turn that income which is now not subject to self employment (SE) tax, into SE tax income - and would have to pay 15.3% extra tax. If you file as a Corporation, you now pay taxes on that profit at 15%-25% for average levels of income. AND you must take the money out either as wages or as dividends - subjecting yourself to double taxation. When you sell the property, and you want to take the sales proceeds out - that double taxation will REALLY mean something to you. If you operate properties in more than one state, the LLC's may not follow the same rules in each state. And alternative? You might look at an S-Corp. Rules are the same all over the country. Income passes through to you, as if it were a partnership. But, it gives you the full liability protection of a corporation. The income is not taxed for SE (saves you 15.3% over a 'partnership' SE) There is no double taxation when you take the income. There are many more issues to consider before you make a decision. Talk to a pro, not a columnist, ok? Oh, one last note - if you are concerned about protecting yourself and your assets from liability, I would put each property into its own entity( S-Corp?). That way, if a tenant does sue and win a major judgement, the other properties are are not jeopardized. Best wishes Eva Rosenberg Your TaxMama  |
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| Library of Congress - ISSN 1532-0790 Copyright © 2000-2009 - Eva Rosenberg |
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