LLC Rental Tax Question-newbie
My wife and I have a duplex that we are transferring to an LLC. My question is if we take the profits from the LLC rental and repay the mortgage early or don't take any profit disbursement and put the profit into an account for future repairs, expenses, etc, are there any taxes paid? Or is income tax only paid if we take a disbursement of the profit? ALSO, the mortgage, insurance, property taxes are 1400/month. The revenue total from our 2 tenants is 2100/month. If we did take some profit disbursement, we only pay tax on what we take out of the LLC, correct? Thanks!!
You pay tax on the profit...regardless if you take it out of the LLC account or not.
You may want to read another post that I just posted a couple nights ago about what taxable income is. For starters, what you pay in taxes isn't a function of how much money you take into or out of the business. And, taxable income isn't simply based on how much extra cash you have from one year to the next. Also, the money you pay towards principal has no bearing whatsoever on the taxes you pay (other than as it relates to how much interest expense you pay). Likewise, when you take out a loan, as in a refi, and get loans proceeds, that money has no bearing on your taxable income.
Taxable income is basically (for a rental property): rental income minus the year's expenses.
You'll also need to (generally) understand how depreciation expense is calculated and that it is a factor in your yearly expenses.
It depends on how your LLC is taxed. i most LLCs at least the common use for them they're taxed as S corperations or C corps. the profits your LLC make should flow through to you and then taxed at your personal tax rate if its taxed at a S corp. On the other hand if its taxed as a C corp it should pass profits through quarterly or yearly thus giving you the option to spend money on expenses first then be taxed on whats left (i think i've only dealt with S corp. style LLC at this point). For real estate i'm pretty sure you'll be set up as an LLC taxed as an S corp. though hope that helped some
My understanding is that a C-Corp whose only assets are passive income investments (such as rental property), is classified as a Personal Holding Corporation with very high tax rates.
Something to check with your CPA and tax advisor.