Rental Property And Schedule C
Hi, I need clarification with a couple of things.
I read elsewhere on this site that Rental Income (or money from the sale of investment property) is recorded on Schedule C, this would imply a business entity, if that is true that would come with a Self Employment Tax liability. Is this correct? If so would I be better off setting up a LLC and avoiding that taxation? I just converted a condo from second home to rental (ie I finally found a renter) and I am currently purchasing another rental property in a diferent state. Any advise on how to limit my tax liability and my exposure to litigation would be greatly appreciated. Thanks! oh ps if it matters I have higher a management company to handle the hawaii rental.
The income from your own investment rental properties is reported on Schedule E. A rental property activity is a passive income activity. No self-employment income tax is due on passive income.
Managing rental property for others (e.g., establishing a business entity as a property management company) is an active income business that would be reported on Schedule C if operated as a sole proprietor.
If you read elsewhere on this site comething to the contrary, please give us the reference so we can clarify and perhaps correct this misinformation.
fantasic for tax purposes. Thanks for the clarification.
So at what point would there be a benefit in creating a seperate entity an LLC or S corp, or a trust for that matter, when investing primarily in real estate?
When the risk of losng everything you own in the event of a successful lawsuit is too high a cost to bear, is a good time. If you wait until you are sued, it is too late.
Business entities are primarily for asset protection, not for tax benefits.
The LLC is not recognized by the IRS as a taxable entity. LLCs and their establishment are governed by state law, not the Internal Revenue Code.
The reest of your questions are more appropriate for the Legal Forum.
Hi Loon,
Cost segregation analysis is becoming more and more popular, but usually only makes sense if it is a large property where the benefits will offset the cost of the cost segregation analysis study.
Also, cost segregation can be problematic when a 1031 exchange is involved. You are selling real estate and exchanging into real estate, but doing a cost segregation analysis carves out some property as personal property. So, be careful when a 1031 exchange is involved and crunch the numbers first.
[addsig]
No, it is still considered just a rental. But a L/O of five years or more can be reclassified as an installment sale by the IRS.
[addsig]
Another benefit is that the option consideration is not taxable until the option is exercised or abandoned. You might be sure that your agreements separate them. In fact, I would use a lease and an option as separate agreements and have them reference each other.
Not true. I have been doing and teaching Lease Options since 1995, and not a single foreclosure with me or any of my students. The Tenant is paying for something and receiving it (exclusive rights to purchase the property), whether the Option is exercised or not. There are changing tides and shifts in a couple of states, but other than those exceptions, evicting a Tenant/Buyer is no more difficult than evicting a Tenant.
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"A deal is only as good as the quality of your Contracts." --Me[ Edited by LeaseOptionKing on Date 06/16/2006 ]
You hit the nail right on the head, Chris.
Da Wiz
NewKid,
Your wish is my command: http://www.ciremagazine.com/article.php?article_id=691
Da Wiz
King,
I said legal according to the iRS. Of course lease options are legal and I believe they are an excellent way to acquire properties. In my opinion, however, they are potential disasters for sellers unless absolutely structured properly, and even then, they violate the DOSC.
Da Wiz