LLC’s Tax Filling Rules. Watch the Video!
- Having separate LLCs for each rental property, for legal reasons, and tax reasons
- Obtaining a line of credit or a credit card in the name of the LLC, as you would not want it tied to your personal name. You would want it tied to the employer identification number (EIN) of the LLC itself and you would want to be able to charge anything that’s related to that LLC on the LLC’s credit card or line of credit.
- If you’re using personal funds to pay for business expenses or vice versa (called commingling funds), the IRS can actually bust through, as well as legal issues can bust through, your LLC segregation and get to your personal assets or business assets.
Hi everyone. This is Shauna, the Tax Goddess. Today, we are going to talk about Limited Liability Companies (LLCs). I would suggest having separate LLCs for each rental property, for legal reasons (you may check with your attorney), and for tax reasons. If you have partners, I would highly recommend having an operating agreement. One should not get into any business without having an operating agreement. Specifically, real estate can be very particular about how it is handled.
Say you’ve bought a property and set up your LLC. Next, you want to claim the property but there’s no money in the LLC bank account to pay for the repairs or to pay for the AC that needs to be replaced. Now, how do we get money into the LLC bank account to properly segregate the LLC’s expenses from your personal bank account? Make sure that you’re tracking everything properly. The easiest way to do that is to make a loan to the LLC. So, if you know that the repairs and the initial start-up is going to cost, let’s say $5,000, maybe add another $500 or $1,000 into that bank account to make sure there’s enough cash for any unplanned expenses, and then make a loan to the LLC. Over time, as the LLC is collecting rent and is saving its profit in its bank account, you can start paying that $5,000 loan back to your personal account.
The second way to accomplish this would be to obtain a line of credit or a credit card in the name of the LLC, as you would not want it tied to your personal name. You would want it tied to the employer identification number (EIN) of the LLC itself and you would want to be able to charge anything that’s related to that LLC on the LLC’s credit card or line of credit. The third way (probably the worst), which most people do, is using their personal money to pay for things that belong to the LLC. The whole purpose of setting up an LLC is generally to segregate the liability of the entity and your personal world into two separate buckets. If you’re using personal funds to pay for business expenses or vice versa (called co-mingling funds), the IRS can actually bust through, as well as legal issues can bust through, your LLC segregation and get to your personal assets or business assets.
The judiciary, in such court cases, has stated that if you’re treating your entity like a piggy bank then they will too. Thus, segregate your money; segregate the entities; segregate the bank accounts; and, keep them as squeaky clean as you possibly can. It will only save you the headache and hassle down the road.
