Bird Dog Tax Question
Hi, i was wondering if rental income is taxed at a higher rate when added to personal income rather then when it's business income (i.e. for realtor). Is it more benificial to start a co. when investing in real estate/renting or are individuals also making money? I ask b/c i'm a soph at Drexel U. and it seems like there are dozens of business taxes here in Philly. And i guess you HAVE to let uncle sam know about any extra income?
I own a rental property in NJ and I use an LLC entity to hold my investment in. There are several reasons for this. First, the Limited Liability for it. If someone slips and falls on the property - you would not be personally held responsible, they cannot go after your personal assets, just what's under your LLC's name. Second, there is a level of anonymity that comes with an LLC. You can act as an agent for this company instead of being personally responsible for all the tenant's problems. If you have to evict a tenant, you can say you are acting on behalf of the company - and they will hate the company, not necessarily you personally. You are just the messenger. Third - Expenses... Here is where your question comes into play specifically... If you have a company that you are doing property management with, you can deduct all your business expenses related to the investment - i.e. mileage, repair costs, etc as well as other "business" expenses i.e. dinner if you and a business partner go out and talk about invesments...
I am not sure about the Business tax you speak of, but I do know that with personal income, its taxed FIRST and then you can spend it... With a company, you SPEND money first and what's left over you are taxed on...
I probably confused you a little bit, but I hope this answered your question. If not - write back and I'll respond...
Good Luck!
Matt
Matt, when u say ur an "agent" for the LLC, have u ever had tenants ask to see the "owner" etc. or question ur position? Also, I've had an internship at a wholesale co. which owned several real estate holding co's. They didnt have a physical location just a FEIN and they worked well for their tax purposes so i was wondering if ur LLC has an actual physical location or just on papers. And with co. expenses, are there any gov. guides about what/how much u can claim? Some of Robert Kiyosaki's books say to claim everything (i.e. cars) but i'm not sure if the gov. would view a new 330 convertible as a necessary company expense. Any insight? (and sorry for all the annoying questions)
Part 2...
and in philly... on top of real estate and sales tax... there are also business license, b. privilege, net profits, use and occupancy, realty transfer, etc. taxes not to mention state and federal... is it like this in most cities?
Edyta --
First let me answer your inital question of tax rates. The answer is...it depends.
As an individual, you would file Schedule E as a part of your 1040 for federal taxes. Because you are filing a Sch E, and have not utilized an LLC, S-Corp, or partnership, you are an "ACTIVE" participant meaning you will be taxed at your individual tax rate, however because you are an active participant in the business you will also be subject to self-employment tax which is an additional tax paid for individuals who run businesses out of their home utilizing there SSN as the business Tax ID. Does this mean your taxes are higher than a "businesses" tax?...yes and no. If your entity is a C-Corp, then your taxes will be lower. C-Corps have higher tax bracktes than individuals, thus your taxes paid will be higher. However, if you form, an LLC, LLP, Partnership, or S-Corp, all income and expenses from the business will pass through to your personal tax return and will be taxed at your PERSONAL tax rate. Also, if you form any of these entities, you can be a passive partner, sheltering the income from self employment tax. This should address your issue for both Federal and State Income taxes. Now as far as local taxes are concerned, you should seek advice from a CPA in Pilly.
Chris 8-)
[ Edited by rogersce on Date 03/19/2004 ][ Edited by rogersce on Date 04/02/2004 ]