Land Trusts and Taxation

[dlmcgill]

Say for example:  You purchase an investment property (townhome - used as a rental) in your own name.  Quit claim it to the LLC.  And sell it 3 years later for a profit.  For tax purposes, is it better to have the LLC as a sole proprietorship or corporation?  Granted: so far this has been a one time deal.

dlmcgill

[Dave T]

Keep your investment property in an LLC treated as a partnership or sole proprietorship to preserve all the tax benefits of investment property ownership that flow through to your personal income tax return -- 1031 exchange, capital gains tax treatment, installment sale tax treatment, and the passive loss allowance offset against other ordinary income.

Reserve the LLC taxed as an S-corp for your dealer inventory and your active income activities so you can minimize the self-employment income taxes.  In a few instances, you might want your LLC to be treated as a C-corp, though S-corp will probably be the general rule.

[dlmcgill]

Hi Dave:

Thanks for the response.  I just want to make sure that I understand your post.  Sounds like you're saying it's best to have two LLC's?  One LLC for the investment property to be treated as a partnership or sole proprietorship.  And the other LLC to be used as a S or C corp for the business side.  Is this correct?

dlmcgill

[Dave T]

"Business side" ????

Some real estate activities are active income activities and others are passive income activities.  Property flipping, contract assignments, John Locke's Subject To technique, sandwich lease options, and even birddogging are active income activities.  

When you hold property indefinitely for the production of income (rental) or for future appreciation, then your real estate activity is a passive income activity

I am saying that if you plan to engage in an active income activity, the LLC treated as an S-Corp is better for you.  If you plan to engage in a passive income activity, then the LLC treated as a partnership or as a sole proprietor is better for you.

You don't need two LLCs for the same real estate activity.

[dlmcgill]

Makes perfect since now.  
Thanks again Dave.

dlmcgill

[TruAxiom]

So, if an agent who is also an investor were to set up LLCs, then it would be best to have the one their agent sales pt is under as well as rental LLCs treated as corporations and the rest treated as partnerships/proprietorships?

Hopefully I got it.  LoL. If not, just let me know.

Also, I found on the MD Comptroller site the following:

'Maryland will follow the IRS rules for a single member LLC electing to be disregarded as a separate entity ("check the box") and certain partnerships that do not actively conduct a business that have elected not to be treated as a partnership.'

This leads me to believe that we have the option to be taxed as a S-Corporation.  Am I interpretting it right?

"Business side" ????

Some real estate activities are active income activities and others are passive income activities.  Property flipping, contract assignments, John Locke's Subject To technique, sandwich lease options, and even birddogging are active income activities.  

When you hold property indefinitely for the production of income (rental) or for future appreciation, then your real estate activity is a passive income activity

I am saying that if you plan to engage in an active income activity, the LLC treated as an S-Corp is better for you.  If you plan to engage in a passive income activity, then the LLC treated as a partnership or as a sole proprietor is better for you.

You don't need two LLCs for the same real estate activity.

[Dave T]

Go back to my earlier comments in this thread and Mark Wagner's supplemental comments.

If you want your LLC to be treated as a corporation, file Form 8832.  The default is to a C-corporation.   You need to file another form with the IRS that changes the tax treatment for your LLC from a C-corp to an S-corp.

[billy9596]

I have 2 properties in Virgina in my name. I also have an    S  CORP. Would it make sence to put this land into a land trust and how much would that cost? do I have to redo the mortgage?

[Dave T]

These questions are more appropriate for your attorney.  

[TruAxiom]

I understand that Dave. My question was whether or not the treatment of an LLC s a corporation is allowed in MD since some states don't allow it (according to another post).  I found a blurb on the MD Comptroller's page and whether or not anyone else interpretted it the same as I did.

Go back to my earlier comments in this thread and Mark Wagner's supplemental comments.

If you want your LLC to be treated as a corporation, file Form 8832.  The default is to a C-corporation.   You need to file another form with the IRS that changes the tax treatment for your LLC from a C-corp to an S-corp.

[Dave T]

The treatment we have been discussing so far is for federal income tax reporting.  

MD requires a separate state business return for your LLC depending upon how you elect to have your LLC treated for federal income tax purposes.  If your LLC is treated for federal income tax purposes as a disregarded entity, as a partnership, or as an S-corp, then it is a pass-through entity.  In MD, pass-through entities file a Pass-through Entity Income tax Return, using MD Form 510.

If your LLC is treated as a C-corporation which files a federal corporate tax return in its own right (Form 1120), then your LLC will file a MD Corporation Income Tax Return, using MD Form 500.

Hope this answers your question.

[TruAxiom]

It does.  Thanks Dave!

The treatment we have been discussing so far is for federal income tax reporting.  

MD requires a separate state business return for your LLC depending upon how you elect to have your LLC treated for federal income tax purposes.  If your LLC is treated for federal income tax purposes as a disregarded entity, as a partnership, or as an S-corp, then it is a pass-through entity.  In MD, pass-through entities file a Pass-through Entity Income tax Return, using MD Form 510.

If your LLC is treated as a C-corporation which files a federal corporate tax return in its own right (Form 1120), then your LLC will file a MD Corporation Income Tax Return, using MD Form 500.

Hope this answers your question.