Cash & Tax losses! What to do?

[TorrePendente]

Hi,
I'm a new investor with three properties in the SW US area. I incurred over $16,000 worth of losses in 2004 and unable to write them off as my income is over $150,000. I'm considering creating an LLC for these properties. Will LLC somehow allow me to deduct my future income/losses? Help, I don't want to be stuck with cash and tax losses again!

[kbrandau]

I'm not totally up on the over $150k AGI, but a LLC provides the owners with a K1, with profit or loss, and are you allowed to report the losses reported from a K1?  Can you qualify as a Real Estate Professional?  working over 750 hours per year in the field of real estate (which includes RE Investing)?

I recommend that you speak with an accountant, and or tax attorney and get clarification.

Don't ever ask the IRS!

Good Luck!

[Dave T]

TorrePendente,

Rental property investing is a passive income activity.  If you actively participate in your rental property operations and your activity results in a net passive loss, then up to $25K of your net passive loss can be used to offset other ordinary income.  As you know, the passive loss allowance is phased out for incomes above $100K and disappears completely when income exceeds $150K.

All is not lost.  Whenever you can not use your passive loss allowance, your losses are suspended and carried forward to the next tax year.  Suspended losses are used to offset future passive income, or even future capital gains when you sell the property.  

Putting the property into an LLC will not change the passive income nature of the income nor will it change your tax liability.  

I assume that you are working a full time job now, so just putting 750 hours into an active income real estate business will not be sufficient to qualify as a "real estate professional".  

[John Hyre]

Dave T,

Especially well-put answer from someone who puts answers well in general!

John Hyre

[TorrePendente]

Dear Dave T,
Unfortunately I cannot qualify as a Real Estate Professional as I do have a full time job. Now, if I never sell the properties but do a 1031 exchange does it mean that I carry forward those losses forever?
I also found out that an LLC does not provide any type of tax shelter, it's strictrly a liability protection. What's the point of putting it in into an LLC if the rental agreement states that the tenant cannot sue me for any type of injury (slip&fall)? The properties are in the states with very high LLC fees. Is it a waste of money?

[Dave T]

Torre,

I really can't advise you on your asset protection needs.  You need to have this discussion with your own personal advisor, perhaps an attorney who is an entity structure specialist.

Remember that anyone can sue anyone else over anything.  

Scenario 1.  It does not have to be your tenant who sues.  How about the UPS guy who breaks his leg on your front porch when attempting to deliver a package.  You are deemed liable because you were negligent about making some repairs that might have prevented the accident.  The delivery guy's leg got so infected that it had to be amputated, thereby abruptly ending his career with UPS.  The lawsuit resulted in a jury award of $12 million.  Everything you own is taken to satisfy the judgement, and everything you will ever earn in the future is attached to satisfy the judgement.  

Scenario 2,  You are involved in an automobile accident while driving your company car in the normal course of your business.  Someone is killed and you are judged to be at fault.  The plaintiff in a civil suit for wrongful death sues your business, names you personally, and seeks to take everything you own.

Now ask your attorney how a properly structured LLC would help in these situations.  

[TorrePendente]

Dave T,
LLC it is!
it's amazing how many things can happen to you that you can't even imagine.
Thank you!

[wlin]

Hi TorrePendente,
I too have the same problem.  I have loss carry over last several years.  Now, I can not deduct the loss against my regular income.  To be a "real estate professional" can only qualify you to claim the loss now and forward.  From tax SW, I found the carry over loss is suspended.  The loss can only be offset by the gain.

Play with the tax SW, I found forming a LLC, you still can not deduct those carry over loss.  I thought with LLC, you can deduct future loss against your regular income.  Anyone can advise this?

Look like we started the wrong way.  If I can start over, best is to form a LLC.  Then, register the rental properties under the LLC.

Hope you find a solution.

[John Hyre]

LLC makes no difference with respect to carry over losses.  In fact, single-member LLC makes no difference at with regard to any federal income tax issue.  Even an LLC treated as a partnership is nearly tax-neutral.  Bottom line:  While another entity type may have some impact on your taxes, an LLC is almost always tax neutral.

John Hyre